Oil literally makes the world go around-its price thus has a huge impact on the economy of every country. The lull caused by the pandemic which saw a ‘demand destruction’—planes were on the tarmacs, vehicles in the garages, trains idling in stations, factories with their shutters down, witnessed a steep reduction in economic activity and consumption. This resulted in an unprecedented drop in prices—WTI was being quoted at negative and Brent at under US $20. The price war between Saudi Arabia and Russia did not help matters either.
The glad tidings of a vaccine for the virus and the December 3 meeting between OPEC and non-OPEC ministers resulting in a declaration of cooperation to ensure a ‘stable market’ has eased prices. As on December 13, WTI crude traded at about $46.57 while Brent is at $48.70. This has had an impact on global economies—India being no exception. This particularly so since India imports most of its requirements.
India has seen a steady increase in the prices of petrol and diesel. As per the Petroleum Planning and Analysis Cell (PPAC) attached to the Ministry of Petroleum and Natural Gas, as on December 12th diesel was retailing at Rs 73.87 per litre and petrol at 83.71 in Delhi; in Mumbai, it was 80.51 and 90.34 respectively. Petrol has become costlier by 4 percent and diesel by 5 percnt in a span of 20 days. Again, as per the PPAC, this is the 56th revision of price of petrol since April this year; in the case of Diesel, it is the 67th revision. The present prices are the highest in the country since October 2018, when crude prices were in the region of $80 per barrel. These are not pretty statistics.
Taxes obviously form the biggest component and the reason for the increase in prices. While the Government had not passed on the commensurate benefit of the decrease in petrol prices to the consumer, it has with alacrity, imposed taxes with an increase in the global prices. As per the price build-up data of petrol at BPCL outlets as on December 1st in Delhi, the price charged to dealers is only Rs 26.75. To this are added the Central Excise duty component which is Rs.32.98, the VAT component of Rs.19.02 and the marginal cost of the freight and dealer commission. Petrol as on December 1st sold at a whopping cost of Rs.82.40 in Delhi. Thus, the tax component is Rs 52 out of the price of 82.40. or nearly 63 percent of the cost. In the case of diesel, it is Rs 42.47 out of the price of Rs 72.42.
The levies themselves consist of basic excise duty, a Road and Infrastructure cess (previously the Additional duty of excise) on motor spirit, a National Calamity Contingent Duty on crude petroleum, a surcharge (special duty of excise) on motor spirit and a Road and Infrastructure cess on high-speed diesel. These contribute substantially to the kitty of the central government.
Thus, as per the receipt budget of 2020-2021, union excise duties, which primarily are on petroleum products, contributed about Rs 2.32 lakh crores in 2018-2019 and Rs 2.48 lakh crores in 2019-2020. States, which are in an even more fiscally precarious position have also not missed an opportunity to increase the VAT rates on these products. Gujarat, Haryana, Delhi, Maharashtra, Karnataka have all been guilty of raising VAT rates. Crisil, the rating agency, has estimated the states would earn as much as Rs. 1.96 lakh crore in the current fiscal- up from Rs. 1.8 lakh crore in 2019-2020.
Rising fuel prices have a huge adverse impact on the economy. Petroleum products are not in the GST regime—this means input credit is not available and the tax element sticks to all products. Given the universal utilisation of petroleum products, this obviously puts inflationary pressure and increases costs of all products. This flies in the face of concerns which the RBI has expressed recently. In the last Monetary Policy Committee meeting, while keeping the policy rates unchanged, RBI acknowledged that price pressures prevailing in the domestic economy were more severe than estimated. This obviously was one of the reasons why rates were not lowered-and as has been pointed out what this results in is an increase in cost of money which in turn hurts growth.
Which brings us to the crucial need for urgently bringing in petroleum products within the GST fold. While the Central government did include petroleum products within the ambit of GST, five products, crude oil, petrol, diesel, aviation turbine fuel and natural gas were temporarily excluded. They were to be included whenever the GST Council decided to do so. Which is how the Centre and States have been looking at petroleum products as a cash cow and levying central excise duty and VAT on them. While it was necessary to protect the revenues of the Centre and the States when they were entering into GST, it makes little sense to continue to exclude these products now, three years after the implementation of GST. Once within the ambit of GST, it would be the GST Council which would decide on the rate, ensuring uniformity of rates within the country. More importantly, credit of input tax would be available-this will facilitate industry, create audit trails, cut costs and rationalise GST.
Given the revenue from petroleum products being collected by both the Centre and States, this will be a difficult decision but a decision which is essential. And the GST Council would need to take this sooner rather than later. And a collateral benefit, of course, would be that this will increase GST revenues and reduce compensation requirements.
—Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal
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First Published: IST