Soaring Fuel Prices — Unraveling the Mystery

In September 2018, fuel prices reached the peak of their steady climb with petrol costing a record 88.67  rupees per litre in Maharashtra.. The ‘Bharath bandh’ led by opposition parties did little, and they were unable to convince the government to reduce tax or put fuel prices under the ambit of GST.

This price hike is the result of a long chain of events– the government regulated fuel prices till 2014, but these subsidies to the fuel sector amounted to a loss of efficiency for the oil companies, and discouraged both foreign and domestic investments in the fuel sector. The great global slump of oil prices saw international prices drop lower than the oil prices set by the Indian government. So, India removed price controls, leading to reduced oil prices in the country. Instead of transferring this reduction to fuel prices for the consumers, they maintained the price level by increasing taxes, thereby increasing revenue. Now lately, the oil cut off by OPEC has been pushing global oil prices upwards, leading to the rise of domestic fuel prices– a burden that has been passed entirely on the consumers. The US sanctions on imports from Iran can further aggravate the issue as Iran is India’s third largest supplier of oil (Source: The Hindu Business Line). Weakening of the rupee against the dollar has also contributed its part in the increasing fuel prices, as the dollar is the currency of oil trade.

The domestic price of petrol and diesel is the sum of excise duty, VAT and the commission pocketed by dealers. According to oil companies, the price for petrol and diesel at the refinery gate is around 40.45 per litre and 44.28 rupees per litre respectively (source: Times of India)– central and state taxes make up for half the retail price of fuel. The centre charges rupees 19.48/litre on petrol and rupees 15.33/litre on diesel, while VAT on the same varies from state to state. For instance, in Delhi, due to a 27% tax rate, petrol prices are lower compared to other metros, while Maharashtra has the highest prices with a VAT rate of 39.12% (source: economic times).

It is here that we understand the unwillingness of the government to reduce fuel tax or add it under GST, as it is a major source of tax revenue in the country. Under GST, goods are taxed under either of the four slabs: 5%, 12%, 18% and 28%, while the government is currently charging around a 100% tax on petrol and a 66% tax on diesel (source: The Hindu). By bringing the fuel sector under GST, the highest the government can tax is 28% of which 19% will go the centre and the rest to the state. The government will therefore lose revenue, which will have a monumental impact on the economic growth of the country as the small increase in demand would be unable to compensate for the reduction in tax revenue. The government will have to cut down on its social expenditure, increase its borrowing, thereby increasing the interest payments and widening the fiscal deficit.

One solution to this dilemma is to create a new tax slab for the fuel sector, and bring it under GST. Or, the government needs to look for the other viable sources of revenue instead of relying heavily on the tax revenue from fuels. Another option is to introduce a new tax scheme of ‘GST and VAT’ on fuels, where the government and the state collect GST, on top of which the state can collect VAT, consequently avoiding an adverse impact on the state exchequer. The advocates of GST may beg to disagree as it was introduced as a single unifying tax structure, but it has already betrayed its founding concept by having four different tax slabs for goods. With the 2019 elections around the corner, the government will have to look for better and more sustainable policies in order to bring the situation under control.

Picture Source: TheMirror

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