Why you shouldn’t expect a cut in fuel prices soon

Why you shouldn’t expect a cut in fuel prices soon

News:  

1. Centre decided not to cut the fuel tax on petrol and diesel due to risk of revenue reduction upto 30,000 crore.

Important facts:

2. Recently petrol in India has been most expensive in South Asia.
3. Reducing oil price by Rs 2 per litre would impact revenue by Rs 28,000- 30,000 crore.
4. Tax as reason for high oil price

• 46% of the oil price is constituted of taxes like Value Added tax (VAT).

• Maharashtra earned highest revenue from sales tax/VAT on petroleum products in the country followed by UP, Tamil Nadu, Gujarat and Karnataka.
• Being an ad valorem tax (based on value), high oil prices results in higher revenues for the government.
• Crude petroleum attracts 20% oil industry development cess, and a National Calamity Contingent Duty (NCCD) of Rs 50 per metric tonne.
• Petrol and diesel attract a Customs duty of 2.5%.
• The Centre raised excise duty nine times between 2014-2016.

5. Reason for non reduction in taxes

• Taxes are a key revenue source for both the Centre and states, and a cut will hit their fiscal position.
• Revenue collected is used to finance the high gross fiscal deficit as a percentage of their GDP.
• Besides taxes, the Centre and the states have other earnings, too, from the petroleum sector.
• For example, dividend income, dividend distribution tax, corporate/income tax and profit on exploration of oil and gas etc. shore up government earnings.

• Centre expect states to reduce VAT, as they pass on over 40% of the taxes to the states by horizontal fiscal devolution

• The oil tax cut, will involve making budget cuts in developmental expenditure for welfare schemes.

5. Reasons against non reduction of taxes

• All fuel product prices are not market-linked e.g.,Kerosene and LPG prices continue to be regulated by government. So the government may still have to bear some direct costs by subsidising these products to protect society’s weaker sections.
• Also, higher oil prices and capital outflows push up inflation, which will increase the government’s borrowing costs.

6. GST regime

•  Neither Centre nor states are willing to include the five petroleum products (crude oil, high speed diesel, petrol, natural gas, and aviation turbine fuel in the GST tax regime.
• Even if petrol and diesel are included under GST, prices are unlikely to fall because of the GST principle of keeping rates close to the earlier tax rates.

7. The rational approach ahead:

• Increase the taxation base of direct taxes from income-tax and GST.
• Improve GDP to non-oil tax ratio so that burden of taxation on oil can be reduced.