‘Increase in excise duty has upset the equilibrium’
Excerpts from an interview with Kerala Finance Minister T.M. Thomas Isaac:
How do the State governments see the trend of very high increase in the price of petroleum products?
On the one hand, this hike is resulting in an escalation of State government expenditures. And there is increasing pressure on State governments to bring down VAT [value added tax] to a revenue neutral position at least. So, on the one hand, the burden of increasing expenditure will be on the State government, but there will not be a commensurate increase in State government revenue. This is going to have an adverse effect on the budgets of the State governments.
Many suggestions are being made for bringing down fuel prices. One is that the Central government reduce excise duty. Two, that the State governments reduce VAT. And three, petroleum products should be included in the goods and services tax framework. Which of these will be a prudent solution?
No State government has increased VAT. So, there is no merit in asking for VAT to be reduced. In fact, it was the excise duty that was raised, to a record level: 120 per cent for petrol and 380 per cent for diesel. Therefore, it is these hikes that have to be rolled back. Some people are saying: why don’t you include petroleum products in GST? This simply is a ploy to postpone the rollback in excise hike. For, except for a passing mention,
price and add whatever tax you want to charge. At present, the rate of taxation on petroleum and diesel products is almost the same as the basic price,” Sen said.
An additional factor is the price of finished petroleum. There is a big gap between refining costs in India and abroad because of cheap labour in India. “So, technically, if you go by the cost of crude import, convert it at the present exchange rate and add refining costs, which is on an average Rs.1 to Rs.2 per litre and transport, the basic price should be 30 per cent less than the present basic price. Similarly, if you calculate the crude price at $80 per barrel and if you assume Rs.70 is the rupeedollar rate, the refinery price will not be more than Rs.48,” he said. An additional problem that had cropped up was the declining value of the rupee. When it was stable, the prices of crude were coming down. Yet petroleum prices were calculated as per the finished product in the international market. Petroleum prices were on a par with international prices. The pricing mechanism plus aggressive taxation had added to the costs. the GST council has never discussed this issue seriously. The reason is that if it is brought under the GST, the existing VAT would have to be reduced drastically and the States would have to be compensated. The States’ present compensation cess would be totally inadequate. We will need to put in place additional cess to compensate this. And this will require negotiations. That is going to take time. Let us say, at a time when crude oil prices were falling, the Centre raised the excise duty, saying it is not going to affect the consumer because the price level would be maintained. Should not the reverse take place now? Crude oil prices are rising and so they should reduce the taxes. That is the logical course. That is the solution to the problem.
There is an argument for raising the excise duty and keeping it that way, claiming it is needed for development and social sector spending. This is what the States also say with regard to VAT revenue.
There is no correlation between the increase in petroleum tax revenues and the social expenditure of
CONGRESS SUPPORTERS the Bharat Bandh. at a rally in Kolkata during
KERALA FINANCE Minister T.M. Thomas Isaac.