Fu­elled by Tax

Over the past few months, fuel prices have shot through the roof. We take a closer look to an­a­lyse the el­e­ments be­hind this price hike


An anal­y­sis of the ever-ris­ing fuel prices

Of late, most of us have been fol­low­ing news about fuel prices with the same trep­i­da­tion that we have re­served for hor­ror movies. De­spite know­ing that it is go­ing to be un­pleas­ant, we ea­gerly await the cli­max. Then we gape in­cred­u­lously at the se­ries of events that un­fold; in this case, the most re­cent hike in the price of the golden liq­uid. When a bar­rel of crude oil is cheaper than it used to be a few years ago, why has the price of fuel not gone down pro­por­tion­ately? We did a lit­tle dig­ging to find out. While we did get an­swers, un­for­tu­nately, we did not strike oil..sigh.

Al­most 70 per cent of our petrol con­sump­tion is sup­plied by im­ported crude oil. There­fore, an in­crease in the price of crude oil man­dates a pro­por­tion­ate hike in the price of petrol. In 2013, the price of petrol peaked at Rs 76.06 per litre in the month of Septem­ber (Rs 83.62 per litre - Mum­bai) when the price of crude oil was USD 108.76 per bar­rel. Fast for­ward to May 2018 and the petrol price peaked at Rs 78.43 per litre (Rs 86.24 per litre - Mum­bai) and crude oil cost be­tween USD 75 and 80 per bar­rel through­out the month. Al­though the price of crude oil has gone down by al­most 30 per cent since 2013, there has been no cor­re­spond­ing de­crease in the price of petrol. On the con­trary, it is more ex­pen­sive now than it was five years ago.

As a mat­ter of fact, be­fore tax, petrol is now cheaper than it was five years ago. The ex­or­bi­tant price of fuel is a direct re­sult of the large per­cent­age of tax levied on it. Dealer com­mis­sion, state gov­ern­ment tax, and cen­tral gov­ern­ment tax are the fac­tors that af­fect the price of petrol. Cen­tral tax has in­creased twofold as com­pared to the sit­u­a­tion five years ago. State tax has shot up by 28 per cent. The only rea­son­able pro­gres­sion in this mix seems to be the dealer com­mis­sion which now con­sti­tutes Rs 3.62 of the price of a litre of petrol. Since Cen­tral and state taxes are a per­cent­age of petrol price, the gov­ern­ment’s rev­enue in­creases with each price hike. While Cen­tral Ex­cise Tax is spe­cific, the State VAT (Value-added Tax) is ad val­orem. Which is why the rate of petrol varies from state to state. One way to bring down the price of crude oil prod­ucts would be to re­vise the taxes; a move that is long over­due.

The gov­ern­ment is re­luc­tant to re­duce the price of petrol be­cause of the con­sid­er­able rev­enue gen­er­ated by the tax on petroleum. In the 2016-17 fis­cal, the Cen­tral gov­ern­ment gen­er­ated a rev­enue of Rs 2.7 lakh crore from the tax im­posed on the petroleum sec­tor. This fig­ure is more than dou­ble of what they re­ceived in the 2014-15 fis­cal, ac­cord­ing to some news agen­cies. They re­port that the State gov­ern­ment’s rev­enue for 2016-17 in­creased by 18 per cent from the Rs 1.6 lakh crore in­come they drew in 2014-15. Be­tween Novem­ber 2014 and Jan­uary 2016, the ex­cise duty was raised nine times. How­ever, it was cut only once, in Oc­to­ber 2017.

The price of petroleum and its prod­ucts could be de­creased if they were in­cluded within the GST (Goods and Ser­vices Tax).

How­ever, con­sid­er­ing the amount of money the gov­ern­ment is cur­rently earn­ing in rev­enue, it is re­luc­tant to in­clude petrol in GST. Of the 28 per cent of GST, the State gov­ern­ment’s share will be 14 per cent as op­posed to the 21.3 per cent they are cur­rently re­ceiv­ing per litre of fuel. This is prob­a­bly why we are yet to ar­rive at an ac­cept­able rate of GST for petroleum prod­ucts that pro­tects the state’s rev­enue while keep­ing petrol ac­ces­si­ble. How­ever, if a sta­ble tax struc­ture is achieved, any ex­cess rev­enue gen­er­ated can be fed into a “sta­bi­liza­tion fund”. The fund will en­able the gov­ern­ment to keep petrol ac­ces­si­ble to the or­di­nary cit­i­zen while cov­er­ing the losses (if any) of oil com­pa­nies.

To sum­ma­rize, the price of petrol can be op­ti­mized, but it can only be done if the gov­ern­ment de­cides to take a pay cut in their tax rev­enue. The oil min­istry main­tain that the gov­ern­ment is “sen­si­tive“to­wards ris­ing fuel prices and is ex­plor­ing al­ter­na­tives. Hope­fully, this sen­si­tiv­ity will re­sult in some ac­tion be­ing taken to al­le­vi­ate the plight of mo­torists across the coun­try in the near fu­ture.

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