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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.