Take reform to fuel: 

Take reform to fuel: 

Context

• Prices of petrol and diesel will come down if states agree on a mechanism to levy GST for oil products

Why is the sale price of oil as high as it was when the crude price was twice as high?

• The government has subsidized the consumers while OMCs and upstream public sector oil companies have been bearing the losses.
• The level of under-recoveries over 2002-2003 to 2012-2013 was Rs 25,000 crore for petrol users and Rs 3, 38,000 crore for diesel users.
• Excise rate on diesel is Rs 17.33 per litre and on petrol it is Rs 21.48 per litre.

Is the Centre to blame?

• The center has subsidized consumers too long and there is no justification for doing so now.

How can the prices be moderated?

• Adjusting the excise duty rates and making them equal for both diesel and petrol would not change the excise duty revenue of the central government.
• It will increase the price of diesel by two per cent and reduce the price of petrol by six per cent.

The benefits of doing this will be

• Reduction in distortion
• Reduced demand for diesel
• A fall in demand for diesel-driven vehicles
• Reduced air pollution
• A fall in carcinogenic emissions
• A decline in diesel imports.

What will be the effects of increasing the prices of diesel?

• A recent study carried out at IRADe has shown the impacts to be miniscule and manageable.
• The introduction of GST has reduced trucking costs substantially by eliminating the wait at check posts for levies such as octroi.
• A two per cent increase in diesel prices can be easily absorbed and no increase in goods distribution cost may be expected.

Are the states to be blamed?

• Apart from the central excise duty, the sale prices of diesel and petrol have increased because of the very high VAT rates imposed by the states.
• Madhya Pradesh imposes a VAT rate of 40 per cent on petrol and 32 per cent on diesel.
• The lowest rates are in Mizoram: 20 per cent on petrol and 12 per cent on diesel.
• The states insist on keeping diesel and petrol out of GST as the tax on diesel and petrol constitutes the bulk of the revenues of many states.
• The VAT rates are in percentage terms, whenever the cost of diesel or petrol increases, revenues of states goes up.

What can be the solution?

• The states have a scope to reduce their VAT rates so that sale price of petrol and diesel can be moderated.
• All states should have a uniform GST rate for diesel and petrol.
• A mechanism needs to be developed to get the states to agree on the GST for petroleum products. Only then the prices of diesel and petrol will come down dramatically.