Excerpts from the interview:

Were the fuel price hikes (accompanied by changes in taxes) avoidable?

The past few weeks have witnessed tremendous debate on inflationary pressures in general and oil prices specifically. After deferring the move for as long as possible, the Government has finally raised the prices of petrol, ATF, diesel and LPG while slashing the rates of customs and excise duty on petroleum products. Partly due to pressure from the Centre, many State governments have followed suit and lowered the rate of VAT or sales tax on fuel.

What role do you see State governments playing with the excise duty and VAT rate cuts?

Customs duty has been reduced from 5 per cent to nil on import of crude oil, 7.5 per cent to 2.5 per cent on petrol and diesel and 10 per cent to 5 per cent on naphtha and aviation turbine fuel. There has also been a reduction of Re 1 in the excise duty on unbranded petrol and diesel.

Simultaneously, various State governments have reduced the VAT rates applicable on petroleum products. For example, the VAT rate on sale of petrol and diesel has been reduced from 28 per cent to 26 per cent in Maharashtra and from 25 per cent to 20 per cent in West Bengal. Cumulatively, these measures would result in an across-the-board reduction of approximately 15 per cent in the retail price of petroleum products. The government has increased the prices of petrol by Rs 5 per litre, diesel by Rs 3 per litre and LPG by Rs 50 per cylinder.

Questions are being raised on the impact of taxes and cutback on duties…

There seems to be some lack of clarity regarding the impact of these tax and duty reductions with respect to easing inflationary pressures in the economy. Questions are also being asked about the impact of the duty reductions on the retail price of petrol and diesel as well as the loss to the government. In our view, these questions are somewhat misplaced for one key reason. In a scenario of rising crude oil prices, the taxes on petrol and diesel are a small component of a much bigger phenomenon.

About the revenue implications — that’s a huge cut for the exchequer…isn’t it?

The government has declared that it would incur a revenue loss on account of these tax reductions to the extent of Rs 23,000 crore in the current fiscal. However, this statement needs closer examination.

The tax revenues accruing to the government from the sector have been increasing over a considerable period of time. The increase is due to both a price effect and a volume effect. As already mentioned, the prices of crude oil have been soaring over the past two years.

With India in the midst of an unprecedented period of economic growth, the consumption volumes have also been on a steep growth path. The net effect is that taxes, which are largely ad valorem, have been growing massively.

The figure doing rounds is a whopping Rs 23,000 crore. Is it being under-estimated?

In case of petrol and diesel, the demand is largely price-inelastic and unless there is a massive increase in prices, the economy would continue to guzzle fuel at the present consumption growth rate. It is not clear what assumptions as to price and consumption underlie the Government’s estimate of the Rs 23,000 crore losses.

However, against such a dynamic and volatile background, any talk of revenue loss seems hypothetical to some extent. Additionally, the revenue loss to the government can be estimated only if either prices or consumption remain reasonably stable. However, in a scenario where both prices and consumption are increasing, the exchequer only stands to benefit.

Do you see the level of consumption hitting a plateau, or perhaps even going downhill?

The most important factor that influences both fuel prices and, by corollary, government revenues, is the level of consumption in the economy. The Indian economy is hugely dependent on oil. The country is connected by an extensive rail and road transport network, which relies on diesel as the primary fuel for commercial vehicular transport.

D. MURALI

KUMAR SHANKAR ROY

More Stories on : Interview | Detaxfication | Taxation | Petroleum

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page