Petroleum Minister Dharmendra Pradhan is under intense political pressure, writes A K Bhattacharya, adding that Pradhan “is being asked to reduce retail prices of petrol and diesel, which have now risen to levels that prevailed a little more than three years ago, when the monthly average price of the Indian basket of crude oil was almost double of what it is today”.
Pradhan, for his part, said on Monday that fuel prices could come down by Diwali, which is next month. The comments come amid criticism by Opposition parties over the sharp rise in oil prices after the daily rate revision mechanism was introduced by the government recently.
However, notwithstanding his remarks on Monday, Pradhan, who was recently elevated to Cabinet rank and given additional charge of the Ministry of Skill Development and Entrepreneurship, has made it clear that the government would not ask state-run oil marketing companies to absorb the price rise in petrol and diesel and would stick with market-driven pricing.
Here are our infographics explaining why retail fuel prices have not moved in sync with crude oil rate changes
“The government has no business to interfere in the day-to-day affairs of companies. We have linked product prices to the market and will stick to that,” said Pradhan after reports had emerged that Bharat Petroleum Corporation (BPC), Hindustan Petroleum Corporation (HPC) and Indian Oil Corporation (IOC) might be asked to absorb the recent global hike in crude oil prices.
Taxes, not crude oil, responsible for fuel price hikes
Amid the recent hike in the prices of petrol and diesel being attributed to wavering market price of crude oil, ASSOCHAM, while dismissing the same, stated that even though the pricing regime is linked to market-determined rates, a sharp hike in taxes in the form of excise and sales tax or VAT by the Centre and the states distorted the path of reforms.
Seeing the three-year high in the prices of these fuels, consumers believe that the concept of market-determined rates has been tampered with by frequent tax hikes.
“Consumers cannot be faulted because the reforms cannot be one way. If the exchequer got a windfall on drop in crude prices by additional taxes, the same must be reduced commensurately,” said ASSOCHAM Secretary General DS Rawat.
Other than ASSOCHAM, Mr Bhattacharya, for his part too, attributes “the tax on petroleum products raised between July 2014 and January 2016” as “the real cause of the current discomfort”.
“… While raising tax rates, Pradhan and (finance minister) Jaitley should have figured out their strategy in the event of oil prices going up and triggering popular unrest. As it turns out, crude oil prices have gone up, but reducing taxes for both the Centre and the states is a difficult task because of revenue and deficit implications,” Mr Bhattacharya writes.
Bringing petrol and diesel within the GST’s ambit?
Last week, Pradhan said he had requested the Ministry of Finance to bring petroleum products within the ambit of the Goods and Services Tax (GST), a move that Mr Bhattacharya describes as “comforting”, in the interest of consumers.
Justifying the move, Pradhan said there has to be a “uniform tax mechanism” all over the country.
As reported earlier, the petroleum ministry’s push for including crude oil, natural gas, petrol, diesel and aviation turbine fuel within the ambit of the GST could bring benefits to the industry as well as customers at a time of rising retail prices.
Oil refiners and marketers are set to take a hit of Rs 25,000 crore a year because of the exclusion of the five petroleum products from the GST. IOC, HPC and BPC are likely to bear a loss of about Rs 5,000 crore in this financial year.
“If this is passed on to consumers, prices may increase by another 60 paise per litre, if the government allows them to do that,” Dhaval Joshi, an analyst with Emkay Global Financial Services, told Business Standard.
Pratik Jain of PwC said bringing fuel under the GST would establish uniformity of prices but it was too early to say whether prices would decline. “That depends on the rate of the GST. The total incidence of taxes on most petroleum products is much higher and I doubt if the GST rate can be around 18 per cent,” he said.
GST to the rescue?
Going ahead with Pradhan’s suggestion could very well work out for the government. “Including petrol and diesel in the GST is a way out, but this is a long-term solution,” writes Mr Bhattacharya.
“Both the GST and enforcing cost-plus pricing for oil companies could be a way out of the Chakravyuha to avoid economic as well as political consequences of the price rise,” he concludes.
States could play spoilsport
Apart from central excise, state VAT is added to fuel pricing. As each state has its own tax structure, prices vary from state to state. States are not keen on including fuel in the GST because they have flexibility in altering these taxes, a lever they will lose under the GST. Losing revenue on this account may not be a deal breaker because states are assured of compensation from the Centre for the first five years.
“States were not willing to include petroleum products in the GST regime because they wanted control over a major source of tax revenue,” said Debasish Mishra, partner, Deloitte Touche Tohmatsu India. He added that this was leading to a continued distortion in taxes imposed by each state.
Abhishek Rastogi, partner, Khaitan & Co, said, “The inclusion of petroleum products in the GST is a necessity. The states should not worry about compensation as there are corresponding provisions.”
