Fuel Price Hike: More than the Center, the States that gain through VAT every time there’s an increase should be held accountable
- In Current Affairs
- 04:34 AM, May 23, 2018
- Ram Narayan
Cui Bono? Whose benefit is it, if the price of petrol is hiked?
“Ninth hike in as many days”, ”Common man under stress”, so scream the headlines. Now that the Karnataka elections are over, the usual bogey of fuel prices has reared its head again. It is true that over the last 8-10 months the price of petrol has gone up by ₹8, but is it really some sort of conspiracy by the Modi government to tax the aam admi?
To unravel this one needs to understand the various heads that go into the final price you pay.
Here’s how it stood in Delhi, as on 24th August 2017)
Simply put, for every litre of Petrol (as on 24 Aug 2017)l:
- Crude oil is imported at $50 per barrel, which is ₹20.19 per litre
- The importer’s revenue in refining it to consumption readiness: ₹9.34 (A reasonable 15% margin going by the ₹3.31)
- Excise collected by Centre: ₹ 21.48, (that's 70% of the input price) bringing it to ₹51.01 at which it is sold to dealers.
- Dealers add ₹3.23, which isn't much of a margin. (Around 6–7%, barely enough to maintain a running business)
- On this, states add the VAT. This varies by state. Some states charge as much as 27% on this ₹54.24 which adds ₹14.64 to your petrol bill.
For every litre of petrol, the refinery charges you ₹9.34 and the dealer ₹3.31 which covers their cost of operations and profit. On the face of it that isn't much. The real culprit is the ₹36.12 that goes by way of central and state taxes, almost half the final price.
Why is it so essential for the government to maintain such high taxes?
Oil excise revenues contributed 54% of Central excise revenues in FY 2015-16, up from 29 and 34% the previous two years. Excise contribution to total taxes also rose from 11 to 15% in 2016. The Centre had thus far been taking advantage of low global crude oil prices to shore up its revenues, saving up for a rainy day. One really does not wish for a Government to leave 7-8% of their expected revenues at the hands of some random palace murder in Saudi Arabia, or the economic sanctions Iran.
Same goes for the states. Which political party will walk the talk and give up their VAT revenues? For all its talk of being with the people the communist government of Kerala has hiked VAT from 26 to 40% over two years, Tamil Nadu following suit, from 27 to 34% overnight. For a ₹2 increase, Delhi earns ₹1.2cr extra per day, Tamil Nadu ₹9.4cr, West Bengal ₹2.4cr, and Maharashtra. ₹7.1 cr.
Here is the breakup presently: (20 May 2018, Delhi)
The heads are all the same and the calculation methodology is also the same, so here’s how they compare:
- Entry tax: down by ₹3.31 (a 54% drop) compared to August 2017
- Central Excise: down by ₹2 (reduced in October 2017)
- Dealer commission: up ₹0.39
- State VAT: Unchanged at 27%
The killer: Crude prices up $22.5 a barrel, from $50 in August 2017. All others remaining same, that would singularly add around ₹11.25/l to your bill.
In effect the Centre levies ₹5.31 per litre less in taxes now compared to August 2017, without touching State VAT or dealer commissions, so it’s not far off the mark for the Centre to blame crude prices. They’ve indeed tried doing their bit.
Every additional dollar per barrel of crude, adds ₹0.5 to the final price at the pump. The global crude prices are looked at on a 15-day-moving-average basis to look at scope for revisions, thereby softening the blow that daily volatility in the world markets otherwise gives.
It is also pertinent to note, that the entry tax, OMC refining cost, dealer margin, and the Central Excise duty are all absolute figures, which are not a direct function of global crude prices. An absolute value of Central Excise instead of a percentage, is important for the following reasons:
One, Sufficient leg room exists for the Government to shield India from the volatility of global crude prices. Fuel prices are too volatile, and stable fuel prices and its cascading effect on every other price in daily life, is essential to the consumption power of citizens.
Secondly, GST for fuel is not the solution to this. Even on a GST slab of 28% that would replace the Central Excise and State VAT, the final price comes to ₹ 51. That’s because GST would only be levied at the import point, then when the Oil marketing companies sell to the dealer, and then when the dealer sells you, the consumer. Tax revenues drop to ₹ 10.62, as against ₹ 35.66 in the existing regime. The Government cannot afford to have such a drastic shortfall in revenues. To obtain GST tax revenues on petrol similar to what is being levied now, the Centre would have to levy a 94% rate!
Also, moving to a GST regime has the disadvantage of being too closely tied to global crude prices, due to taxes being a percentage on the crude price. In a 28% GST regime, every incremental dollar per barrel adds ₹ 0.65-0.70 to the final price, that’s 20% more than the incremental value currently.
Where the Centre can intervene currently is in taking the bold step of subsuming the State VAT into the Central Excise being levied. They can then devolve the money later to the States along with the regular transfers to States. As it is the States do not bother cutting down on their VAT levies anyway. Only four heeded Minister Dharmendra Pradhan’s call to States to reduce VAT. Secondly, it would allow for even lesser volatility as the percentage VAT would be replaced by increased absolute figure of Central Excise, which can be controlled by the Centre.
In short, crude prices have caused a ₹11 increase in fuel prices over 8 months, but that’s tempered by a ₹5.31 reduction in taxes. The real winners are the States who gain through VAT every time there’s an increase, while the Centre gets nothing extra, as they charge a flat Excise. They are the real gainers who need to be held accountable.
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