Reduce taxes on petroleum products

The Centre may also audit the impact of daily pricing of petrol and diesel, and if need be, withdraw this in favour of a periodic review
Reduce taxes on petroleum products

For the last four years, global crude prices have been low. As a result, domestic petroleum prices could be kept under control. At one point of time in 2015, petrol and diesel prices were just Rs 56.5 and Rs 46 per litre respectively. Governments, both at the Centre and the states, increased their taxes. Petroleum companies were also allowed to increase their profits in the name of compensation for their losses in the past.

But in the last few months, rising global crude prices have affected consumers. Consumers have been solely made to bear the burden of rising crude prices. Governments are not ready to reduce their taxes and petroleum companies are also not ready to tweak their profits. People are anguished, and rightly so. To somehow cool down this anger, the Centre has now indicated that it would bring down the prices.
At one point of time the prices of petrol, diesel and LPG were all under the government’s control. The central government used to foot the subsidies bill to keep the prices low. In 2012-13 the petroleum subsidy bill had reached nearly Rs 97,000 crore.

The argument then was that as the prices of petroleum products affect the costs of living, by keeping these prices low, we can reduce the costs of living. Another argument being advanced in favour of this policy was that increase in petroleum prices may have a multiplier effect on inflation, because it increases transport and energy costs. When petroleum products were under the control of the government, petroleum companies also took responsibility of the same—at least partially.

To stabilise the prices, oil marketing companies used to issue ‘oil bonds’ and raise money to bear the loss. And when crude prices were lower, money borrowed through these bonds used to be repaid. Therefore, prices also were stabilised and petroleum companies were not facing losses.

In June 2010 the Centre decided to decontrol the petroleum prices in the name of petroleum reforms. It was decided that petroleum prices would be determined by the market and the government would reduce the subsidy slowly. First, the subsidy on petrol was abolished and later gradually the diesel subsidy was removed. Though the LPG subsidy was not substantially reduced, this subsidy was transferred to the bank accounts of the beneficiaries directly under the present government. The Centre, in particular the prime minister, appealed to those who could afford the market price to give up their subsidy. Proceeds from that were used to finance free gas connections for poor women under the ‘Ujjwala’ scheme.

It is notable that when the prices used to be controlled, even then the petroleum companies used to make huge profits. In 2008-09, ONGC earned a net profit of Rs 16,041 crore, GAIL Rs 2,814 crore and Indian Oil Corporation Rs 2,570 crore. This was incidentally the year in which the highest-ever crude prices were recorded in the international market. However, when prices started getting determined by the market, profits of these companies started increasing in leaps and bounds.

Now, for the past couple of months, petroleum prices are being determined on a daily basis. Though there was hardly any reason for shifting to this mechanism, it was said that petroleum companies would be allowed to change prices based on the daily-changing prices of global crude. The same method is practiced in other countries as well, the Centre claimed.

As a result of this method, the prices of petrol and diesel in Delhi reached Rs 77.47 and Rs 68.53 per litre, whereas in Mumbai it hit Rs 85.29 and Rs 72.96 per litre on May 24. Profits of petroleum companies have also gone up significantly and in the fourth quarter of 2017-18 Indian Oil Corporation recorded profits of Rs 5,218 crore—40 per cent higher than the figure for the same quarter last year.

On the other hand, we also notice that in the last four years, there has been a mammoth increase in central and state taxes on petroleum. In 2004, total taxes on petrol were 43 per cent. Today, it is over 100 per cent. In 2014, the dealer price before taxes was Rs 47.2 per litre. Today it is only Rs 37.2 but the price is higher than the 2014 prices. This is due to implementation of high rates of excise duty by the Centre and VAT by the states. Therefore consumers’ anger is seemingly genuine. The government can raise its revenue, but it should be done judiciously. In the past three to four years inflation has been under control; retail inflation was around 3 per cent. In the last couple of months, signs of inflation have once again started getting visible, when inflation crossed 5 per cent. In April it was 4.6 per cent.

It’s an accepted fact that petroleum prices play a crucial role in fuelling inflation. As we know, the RBI’s monetary policy is greatly influenced by inflation. The RBI, or for that matter any central bank would want real interest rates (that is, money rate of interest minus inflation) to be positive to incentivise savings. Increase in interest rates would mean costlier housing and consumer loans, causing a hike in EMIs. That may not only cause hardships to the people but may also affect demand for housing and consumer durables in the future. This inflation may also affect the value of the rupee, causing imports to be dearer. The cost of tourism will increase and cost of foreign studies will also shoot up.

Therefore, a prudent policy would be to control petroleum prices. We don’t have any control on global crude prices; however the Centre can definitely reduce its taxes and can persuade state governments to reduce their taxes to bring down the blistering prices. The government may also audit the impact of daily pricing of petrol and diesel, and if need be, withdraw this policy in favour of a periodic review, to give immediate relief to consumers and the transport sector.

Ashwani Mahajan

Associate Professor, PGDAV College, University of Delhi

ashwanimahajan@rediffmail.com

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