Skyrocketing fuel prices
A number of factors are contributing to the skyrocketing fuel prices, the least of them being state and central government taxes. What are the compulsions of such exorbitant taxation levels, and is it possible to leash them down? An analysis…..
Today, petroleum has become as vital as water for human existence. This is so as our movement is dependent on transport and transport is dependent on petroleum fuel. James Buchan has said, “The use of refined petroleum as fuel, which began in the 1850s, freed hundreds of millions of people from the toil of centuries, gave hundreds of millions more a life of ease and plenty, and, by allowing great cities to feed themselves from every corner of the world, multiplied the population of the earth fivefold.”
There are signs that the age of petroleum has passed its zenith but the fact remains that it still rules the roost. Petroleum, also known as crude oil, is a naturally occurring liquid found beneath the earth’s surface, which can be refined into fuel such as petrol, diesel and many other products. Petroleum is a fossil fuel, meaning, that it has been created by the decomposition of organic matter over millions of years. India produces a very small quantity of petroleum as we are poor in its reserves and that compels us to depend upon imports for our needs. Our import of oil amounts to almost 80% of our needs and this makes us very vulnerable to the frequent price rises of fuel.
Today, petrol and diesel are in the news for the wrong reasons. There is a sharp rise in their prices. There is anger amongst people as the price has crossed Rs.100 everywhere in the country. The anger is mainly against the central government as people feel that the price of petrol and diesel is under the regulation of the central government. It is desirable that we should understand the mechanics of the costing components of oil. The costing components include :
- The global price of crude oil
- Rupee value against foreign currency for purchase, such as the dollar
- Refining cost
- Central Government tax levy like excise duty and cess
- State Government tax levy or VAT, which differs from state to state
- Commission to petrol pump dealers.
The price of the fuel has increased since 5th July and it is much higher in other states where VAT is higher. VAT is applicable ad valorem (more the value, more the leviable tax) as against the fixed quantum of tax in the case of central excise duty. The cost of fuel in Mumbai as of 5th July 2021 was Rs.105.92 per litre for petrol and Rs.96.91 per litre for diesel. The highest cost that day was Rs.110.85 per litre for petrol and Rs.102.32 per litre diesel in Ganganagar, Rajasthan. It is apparent from the costing table that taxes of central government and state government constitute a sizable portion of the cost of fuel. The price of fuel is deregulated and its pricing is determined on a daily basis by the petroleum marketing companies since 2010. The government has no say except to collect its share of taxes. For the financial year 2020-2021, the central government collected Rs.3.40 lakh crore as central excise duty including cess while state governments collected Rs.2.03 lakh crore as VAT.
A. CRUDE OIL COSTING AS ON 5TH JULY 2021
- International price of Brent Crude oil – $76.49 per barrel
- Currency exchange rate – Rs.74.29/US dollar
- Crude oil in Indian currency – Rs.5682 per barrel
- One barrel of crude oil – 159 litres
- Crude oil cost per litre – Rs.35.73/litre
B. COSTING OF PETROL AND DIESEL IN DELHI (PER LITRE)
Petrol price | Diesel price | |
---|---|---|
Crude oil cost per litre | Rs.35.73 | Rs.35.73 |
Refinery charges for processing and margins and freight | Rs.4.39 | Rs.6.17 |
Fuel price after processing | Rs.40.12 | Rs.41.90 |
Additional excise duty, road cess as charged by Central Government | Rs.32.90 | Rs.31.80 |
Commission to petrol pump dealers | Rs.3.79 | Rs.2.59 |
Fuel cost before VAT | Rs.76.81 | Rs.76.29 |
Additional VAT (for Delhi) 30% on petrol and 16.67% on diesel | Rs.23.05 | Rs.12.97 |
Final price as on 5th July 2021 in Delhi | Rs.99.86 | Rs.89.36 |
"There is anger amongst people as fuel price has crossed Rs.100 everywhere in the country. The anger is mainly against the central government as people feel that the price of petrol and diesel is under the regulation of the central government"
During the previous central government’s rule, the price of fuel was controlled somewhat by giving subsidies to the petroleum marketing companies by issuing oil bonds of 15 to 20 years duration. The issue of bonds resulted in the easing of prices of fuel on a temporary basis while accumulating liability for the government for repayment on the maturity of the bonds. The government is paying annual interest on these bonds today, and even after repayment of bonds, the unpaid amount to be paid is Rs.1.31 lakh crores. These days, there is no subsidy on fuel and no such new bonds are issued but the legacy of liability remains.
Looking into the costing of fuel pricing, a natural question emerges as to why so much tax, particularly central government tax, is levied? Before answering this question, we must know that it is the States that finally have a better share of the taxes, as the Centre has to pay back 42% of its collection of central taxes to the states as per the recommendation of the Finance Commission. For FY 2020-2021, the collection of the central government from taxes on fuel will get reduced from Rs.3.40 lakh crore to Rs.1.98 lakh crore while the share of the states from taxes on fuel will go up from Rs.2.03 lakh crore to Rs.3.45 lakh crores. The Centre levies taxes as it requires money to spend for the people of India who are badly hit by corona, such as for giving free vaccines and to provide free ration to about 80 crore poor under the Pradhan Mantri Garib Kalyan Yojana. The income of the government is mainly from taxes and it is compelled to collect more when the need is more.
The collection from indirect tax on fuel is the easiest way, whereas the collection from direct taxes would have been better. Indirect tax is retrograde taxation, as the rich and the poor both pay taxes, say on fuel, in equal measure. Direct tax is progressive taxation where the tax is paid out of the income earned and here, the poor do not pay any tax while the rich have to pay. But unfortunately, our base of direct tax is very narrow and we are not in a position to collect the required tax from a small section of income tax paying taxpayers. This compels a higher levy of the central excise duty on fuel. Even for states, it is easier to have more income from VAT on fuel as even they also require funds.
As per the Union Budget 2021, the deficit projected for FY 2021-22 is pegged at 9.3% while the deficit worked out for FY 2021-2022 is 9.5%. The total tax revenue, both including direct and indirect taxes for FY 2021-2022 has been estimated at Rs.22.17 lakh crore and we have to spend much more due to Covid and on welfare measures, in addition to the required allocations to different ministries. Despite the higher levy of central excise duty, we have a high deficit budget when the deficit should not be more than 3%. So far, inflation is in control but the natural consequence of a high deficit is rising inflation and the same will be bad for the economy and for the people.
Nobody likes fuel prices going up. It is true that the corona pandemic was the major cause of unforeseen expenses of the government. Still, there is a possibility of reduction of both central excise duty and VAT by the states. This can be done by bringing petrol and diesel under GST and for which states must give consent in the GST Council. States and the centre should agree that fuel is not a milking cow.
There is also a case for limiting the expenses of both the centre and the states. There are many administrative expenses that do not benefit either healthcare or which are not for development and such expenses should be identified and limited. It has been observed with disappointment that these days, some governments put emphasis on populist expenses to win elections and thus, precious resources generated from the taxes are withered away. Governments both at the states and centre should remember that a penny saved is a penny earned and that will help in not mounting unwanted tax burden on fuel.
Last and not least, we citizens must resolve to pay direct taxes honestly. There is an unwanted levy of indirect tax on fuel as the government is not able to collect more income tax and corporate tax, as first, the tax base for direct tax is very narrow and secondly, there is a large scale suppression of income and thus, evasion of tax. All stakeholders should come forward and join hands.