No Case for Cut­ting Taxes on Petro-Fu­els

Bring them un­der GST and open up mar­ket­ing

The Economic Times - - Breaking Ideas -

Petroleum min­is­ter Dhar­men­dra Prad­han has done well to rule out gov­ern­ment in­ter­ven­tion to dis­rupt the daily re­vi­sion in petrol and diesel prices. A U-turn on the re­form is wholly avoid­able. There is no case for re­duc­ing taxes on petro-prod­ucts. There is a clam­our now to lower ex­cise duty on petrol and diesel to rein in re­tail prices. It may be re­called that the UPA gov­ern­ment had pro­gres­sively re­duced the tax bur­den on petro-fu­els as crude prices rose, to pro­tect con­sumers. Now that crude prices are less than half their peak lev­els un­der the UPA, it makes sense to bring back the taxes that were with­drawn, to yield much-needed rev­enue. Fos­sil fu­els, in­clud­ing petrol and diesel, qual­ify for dis­in­cen­tivis­ing taxes, from the point of view of their en­vi­ron­men­tal cost as well.

Petrol and diesel at­tract a spe­cific ex­cise duty of 21.48 per litre and 17.33 per litre re­spec­tively, and that in­cludes a cess to fund road projects. The two prod­ucts also at­tract a 2.5% im­port duty. It would make sense to levy an equiv­a­lent im­port duty on crude as well. The tax re­form petro-fu­els need is to bring them un­der the goods and ser­vices tax (GST), with a cess on top to pro­tect states’ rev­enues. To­day, fos­sil fu­els bear a cas­cade of taxes that makes pro­duc­tion in­ef­fi­cient. With GST, re­fin­ers will be able to claim all the credit on taxes paid on in­puts across the value chain, low­er­ing their tax bur­den, and po­ten­tially lead­ing to lower re­tail prices. Trans­port and lo­gis­tics com­pa­nies would be able to claim in­put tax cred­its on their fuel bills, and that would bring down freight costs.

In par­al­lel, the gov­ern­ment must open up mar­ket­ing of petro-fu­els, aban­don­ing the cur­rent pol­icy of re­strict­ing mar­ket­ing rights to a hand­ful of com­pa­nies. The or­gan­ised re­tail in­dus­try, for ex­am­ple, should be free to buy fu­els in bulk and re­tail them at their out­lets, as hap­pens in most de­vel­oped mar­kets. Stor­age and dis­tri­bu­tion in­fra­struc­ture would need to be made ac­ces­si­ble by pure re­tail­ers as well. A pol­icy on in­de­pen­dent oil re­tail­ers will mean more com­pet­i­tive prices that will ben­e­fit con­sumers. And the gov­ern­ment’s sub­sidy bur­den on cook­ing gas and kerosene would come down as well.

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