Should taxes on petro products be reduced?

Petrol and diesel prices have been galloping at the retail level in the last couple of months, and in some places petrol has breached the ₹100/litre mark. The Central Government is facing lot of criticism on this score. To understand the issues involved, all the components of petroleum products’ production and distribution should be analysed dispassionately.

First, India is heavily dependent on the import of crude to meet its oil requirements. Petroleum exporting countries, on their part, try to keep the price of crude as high possible. And to achieve this, they generally enter into agreements to keep the production lower. When Petroleum Minister Dharmendra Pradhan had urged the producers’ group to ease output curbs to fulfil their promise of stable oil prices, the response was not positive.

The price of crude during March 2020 was $32.01 a barrel. During the period November 2020 to March 2021, the price was on a steady rise, at $42.69, $49.99, $54.77, $62.28 and $65.41 respectively ( www.statista.com ).

When the price of imported raw material increases, is it not natural that the end-product also has to cost more?

Second, oil marketing companies now fix the price of end-products based on their own cost of production plus reasonable margin of profit. Earlier, under the administered price mechanism, the companies were facing losses and they had to be bailed out using taxpayers’ money.

The oil marketing companies, therefore, cannot be expected to absorb the increased imported price of raw crude to help the end- consumer.

Third, oil refining companies are importing crude by paying in dollars. During the last one year, the rupee has depreciated by 1.75 per cent and this has to be naturally loaded into the retail price of petroleum products.

Fourth, the cost of refining and distribution up to the last mile has been on the rise.

Fifth, the role of Central and State taxes. Central excise duty accounts for 39 per cent of the price of petrol and 42.5 per cent of that of diesel. After considering local sales tax or VAT, the total tax incidence is about two-thirds of the retail rate. The public expect that the taxes should be reduced by the government, so as to offset the increase in crude price.

According to 15th Finance Commission Chairman NK Singh, India is below its tax potential to the extent of about 4 per cent of GDP. This is a lot — that is, about 25 per cent of the total taxes collected by the Centre and States.

Any government needs funds for its various activities and the avenues open are either to borrow or to tax. It is prudent to tax where the leakage is minimum and where it is easier to administer. Tax on petroleum products is easy to administer and the chances of tax evasion are remote. Which government will let go this lucrative avenue?

Curb consumption

As petro products are not under GST now, the Central and State governments tax them separately. State governments expect the Centre to reduce its tax. The Finance Minister recently said that if the Centre reduces the tax, some State governments may increase their tax and, thereby, nullify the cut. At least when the tax is on petro products, the users pay the tax without any cross-subsidy by others.

India’s crude oil imports in December soared to their highest level in nearly three years to around five million barrels a day as the refiners cranked up output to meet a rebound in fuel demand. As crude imports involve huge outflow of foreign exchange, consumption of petroleum products cannot be encouraged by artificially lowering the price. In fact, only when the price is high, there will be incentive to look for alternative sources of energy.

As pointed out by Dharmendra Pradhan, “High oil prices could benefit a group of producing nations but if you push customers that could lead us to find alternatives.”

The government may try to bring petro products under GST. And there is no point is reducing the tax on petrol and diesel and increasing it on other items. People must accept the reality and either be willing to pay more or reduce their consumption.

After all, those who own motor vehicles are not the poorest of the poor or below the poverty line. Commercial vehicle owners not only pass on the price increase down the line but try to enrich themselves disproportionately. Such exploitation should be curbed.

The writer is a retired banker