Transparent pricing

Govt should explain the fuel tax rationale

Over the past one month, crude oil prices have been somewhat volatile — having moved from about $69 per barrel (Brent) to over $75 and correcting back to about $69 per barrel. There is concern among consumers regarding sustained high pump prices and the Reserve Bank of India has said higher taxes on petroleum products are an important driver of inflation. Union Finance Minister Nirmala Sitharaman has, however, ruled out any reduction in excise duty on petrol and diesel to lower prices. Referring to oil bonds issued by the United Progressive Alliance (UPA) government, the minister noted that payments for past dues posed limitations. Clearly, there is a need for transparency in retail fuel pricing, which is deregulated and is expected to reflect the movement in international crude oil prices. But after touching record highs, retail fuel prices have remained unchanged for a month.

The issuance of oil bonds by the UPA government to cover fuel subsidies was undesirable and should have been avoided. But its impact on the Union Budget is fairly limited now with an interest outgo of under ~10,000 crore. The total interest payment by the Union government in the current year will be over ~8 trillion, while the fiscal deficit is estimated to be at 6.8 per cent of gross domestic product (GDP). Thus, the liability on account of oil bonds is not a major driver of fiscal policy decisions. The government is unwilling to cut taxes for other reasons. The pressure on government finances increased materially last year because of Covid-induced disruption. The government rightly raised taxes on fuel products to raise revenues. As a result, the collection of central excise duty from petroleum products increased by over 60 per cent last fiscal year.

There is a strong case for continuing with higher taxes because government finances are likely to remain under pressure in the foreseeable future. Higher duty on fuel also works as a carbon tax and would encourage the adoption of green technology. Therefore, the government should convey its position transparently — it needs to raise resources to fund expenditure and contain borrowing. However, what is problematic is that a large proportion of revenue from fuel is in the form of cess, which the Union government is not obliged to share with the states. The Central government should have imposed taxes in a fair manner and shared them with state governments. States are at the forefront in dealing with the pandemic and have also suffered revenue losses because of lower economic activity.

Besides, at a broader level, the government needs to work at multiple levels to increase tax collection and reduce its dependence on fuel in the medium term. India’s tax collection as a proportion of GDP has remained stagnant for years. Even in the area of indirect tax, revenue has suffered after the implementation of goods and services tax. Further, state-run oil-marketing companies need to adjust prices transparently. It is not clear why prices of petrol and diesel have remained unchanged for a month. If the firms are waiting for volatility to come down, why did they not do the same when prices were rising? It is possible that oil companies are building a surplus, which can be transferred to the government as dividend. The lack of fairness, clarity, and transparency in pricing of fuel is affecting the government’s credibility.