No Case for Cutting Taxes on Petro-Fuels
Bring them under GST and open up marketing
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that crude prices are less than half their peak levels under the UPA, it makes sense to bring back the taxes that were withdrawn, to yield much-needed revenue.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.