Controversy over petrol-diesel tax
March 01, 2021
There are indications of the Central Govt proposing to bring petroleum products under the purview of GST, this does not seem to be practical due to opposition from the State Governments. However, after the proposal of the Central Govt, there will definitely be some restrain on political parties politicking on the issue. — Dr. Ashwani Mahajan
While the increase in petrol-diesel prices had been a matter of controversy for long, but recently the controversy has deepened further due to the unprecedented increase in the retail price of petrol-diesel in the last two months. It is worth noting that at one point of time the international prices of crude oil had skyrocketed, which later came down drastically. During the Corona period, the prices of crude oil had dipped significantly. But for some time, crude oil prices have started rising again and now they have reached $ 66 per barrel. In the last two months, crude oil prices have increased by 28 percent. In the past, petrol-diesel prices used to be changed after a gap, but for some time, now petrol-diesel prices are changed on daily basis, depending upon the international price of crude oil.
In such a situation, due to continuous increase in the retail price of petrol-diesel due to the increasing international crude prices, there is a huge burden on the people’s pockets. Naturally, the central government bears the brunt of their anger. In such a situation, this anger is increased more when it is said that prior to this government, when the price of crude oil was more than $ 100 per barrel, the price of petrol-diesel was even less. For example, the opposition parties say that even when the price of crude oil was $ 110 per barrel in April 2014, the price of petrol in Delhi was only 72.26 rupees per liter. Today, when the price of crude oil is only $ 66 per barrel, the price of petrol in Delhi has reached more than Rs 91 per liter and the price of diesel has reached more than Rs 81 per liter. So, the question is whether central government is responsible for this? But the facts tell something different.
Truth of petrol-diesel prices
It is true that petrol-diesel prices have been increasing in accordance with international prices of crude oil for some time. But the truth is that only 34 percent of the market price of petrol-diesel is the cost of production and nearly 4 percent is dealer’s commission, the rest of the price is shared by central government and state governments by way of taxes included in it. For example, if we look at the price of Rs 91 per liter of petrol in Delhi, the state government's share in tax is 23 per cent and the central government's share in tax is 40 per cent. But even though apparently the central excise duty and surcharges is 40 percent, we have to understand that 42 percent of all taxes collected by the central government goes to the states and Union Territories, as per the recommendations of the Finance Commission. But there is definitely an issue in the tax imposed by the central government. Before this year's budget, the central government was levying a central excise duty of Rs 2.98 per liter on petrol, a special additional excise duty of Rs 12 and infrastructure surcharge of Rs 18. That means a total of 33 rupees per liter. Surcharge does not have to be shared with the states. Therefore, in addition to the surcharge of Rs 18 per liter with the Central Government, only Rs 8.70 is left after taking out 42 percent of the states from the Central Excise duty of Rs 15 per liter. That is, the central government's share in the price of petrol is actually 26.70 rupees per liter, while the state governments VAT is currently Rs 21 per liter in Delhi. Additionally state governments get Rs 6.30 per litre as their share in central excise duty. The conclusion is that out of the price of Rs. 91 per litre of petrol in Delhi, the Central Government gets Rs. 26.70, the State Government gets Rs. 27.30, whereas the cost of production in the petrol price is only Rs. 33, and appropriately Rs 4 is the distribution cost. Situation in diesel price is more or less the same. But it has to be understood that states where petrol-diesel prices are higher than Delhi, VAT is more in those states. But its true that a large part of the increase in petrol-diesel prices goes to the treasury of the Center and the states and states get slightly a larger part of that.
Can this much tax be justified?
This question is a bit difficult to answer. As far as the consumers are concerned, since they have to bear the burden of this tax directly, they would definitely want tax to be reduced. Protests against taxes are taking place on social media in general. Comparing with other countries, prices of petrol and diesel is much lower in other countries due to lower tax on petrol-diesel. This makes consumer even more disturbed. Some other economists believe that the increase in petrol-diesel prices leads to inflation for two reasons. One, is the cost of distribution and production in the economy increases directly and indirectly. Two, increase in the prices of petroleum products causes price index to go up. Therefore, increase in petrol diesel prices can become the major reason for increasing inflation.
But on the other hand, some fiscal experts believe that the revenues of governments have been greatly impacted in the past (especially due to pandemic). Since petrol and diesel are sold in huge quantity, this can easily increase government revenue (both central and state government), thereby making it possible to increase spending on public welfare (education, health) and development (infrastructure). Due to reduced revenue, either this expenditure will have to be curtailed or the government will have to increase its deficit, due to which again inflation is expected to increase. Apart from this, it is also argued that greater use of petrol-diesel increases our dependence on foreign countries and increases the country's trade deficit. If people are attracted to electric vehicles due to high prices of petrol and diesel, then we will not only save valuable foreign exchange, but will also protect our environment.
As Need to bring GST under the purview
Irrespective of the arguments in favour or against petrol diesel taxes, it cannot be denied that the tax on petrol diesel is very high, whether compared to the past or to other countries. The question is, how can the same be reduced? One solution to this is being suggested is that petroleum products should be brought under the purview of GST. With this, the tax on petroleum products (GST) will not be more than 28 percent. Out of which 71 percent will go to states. Even after this, infrastructure surcharge and agriculture surcharge can be continued to be imposed by the central government. In such a situation, a drastic reduction in the prices of petrol and diesel can be expected. But the problem in this is that when the GST was implemented, at that time the state governments were not ready to cover petroleum products and liquor under the purview of GST. The same situation remains today. Though there are indications of the Central Government proposing to bring petroleum products under the purview of GST, this does not seem to be practical due to opposition from the State Governments. However, after the proposal of the Central Government, there will definitely be some restrictions on political parties politicking on the issue.