Auto fuel price: Does the buck stop with Modi?

All eyes are on Prime Minister Narendra Modi’s office to find a solution that will protect consumers from the flare-up of petrol and diesel prices.

Neither the States nor the Centre is willing to bring down the tax component on the two fuels on the grounds that it could impact government finances and their deficit funding. Besides, the States have flatly refused to bring fuels under Goods and Services Tax (GST).

The government has come in for severe criticism following the recent spike in fuel prices. Explanations and justificiations in defence of the hikes, by Minister for Petroleum & Natural Gas Dharmendra Pradhan, have failed to defuse the situation. This has prompted the PMO to seek information on it.

Though officials in the Ministry downplayed the move, and termed it a normal exercise, the PMO is understood to have sought a report from the Finance Ministry as well.

Experts in the sector say the flare-up in prices can be addressed by correcting the tax structure: the Central Excise Duty (which is specific) and the Value Added Tax (VAT) by the States, which is ad-valorem.

The public sector oil marketing companies revise prices daily, based on a formula. The companies take the 15-day average of the international prices of these products with a two-day lag. They then consider the exchange rates.

Interestingly, since 2014, the base price of petrol and diesel has increased only by ₹2-3 a litre.

What has increased disproportionately is the tax component on these products. On September 16, the base price of petrol was ₹27.70, but after the taxes and levies were added, the retail price was ₹70.48 a litre at Delhi. For diesel, the base price was ₹27.66, whereas the retail price was ₹58.84 a litre at Delhi.

States want the Centre to reduce its duty first, considering that it has been hiked a number of times over the last two years to take advantage of the lower crude oil prices and boost revenues.

“Historically, VAT collections from petroleum were higher, but now it is the revenue from Central duties that have become higher,” pointed out Kerala Finance Minister Thomas Isaac. Since 2015 the excise duty on petrol has been hiked by ₹11.77 per litre and on diesel by ₹13.47 a litre.

The VAT component, which is levied by the States, is as high as 48 per cent in Maharashtra (Mumbai) for petrol, and 38 per cent in Madhya Pradesh in the case of diesel. Finance Minister Arun Jaitley had written to the State Chief Ministers urging them to reduce the VAT burden on petroleum products.

According to the Integrated Research and Action for Development report on ‘Converging the divergence between diesel and petrol prices: A case for rationalisation of the Central Excise Duty’, the Central government should adjust the relative excise rates on diesel and petrol to reduce the price difference between the two.

“This can be done in a way that protects the revenue from the excise on these two products or even slightly increase it. The impact of excise rate equalisation between diesel and petrol that preserves the government’s revenue will increase the price of diesel by just two per cent, while resulting in a six per cent reduction in price of petrol,” it says. It suggests measures to ease adjustment in diesel prices of the anticipated increase.

Expectations that petroleum products would be brought under GST gathered momentum when the States agreed in principle to include natural gas in the ambit of this indirect tax. But petrol and diesel will still take a while.

Bihar Deputy Chief Minister Sushil Kumar Modi told BusinessLine that it would take some time to bring new items under the GST umbrella. “It has been just three months since GST was rolled out. Though the final decision is the Council’s, it seems too early to include petroleum products. First, let the glitches on returns filing and the rest get sorted out.”

Echoing similar thoughts, two other State Finance Ministers said, “The first months of GST have shown that the new levy needs to stabilise. Inclusion of petrol and diesel can be considered after two or three years.”

In 2016-17, excise collections on oil products were ₹2.42 lakh crore. The trend has continued in 2017-18, with Central excise duties touching about ₹1 lakh crore between April and August.

According to data with the Controller General of Accounts, Central excise duty collections in July, which were primarily from petroleum products (as GST had rolled in by then) amounted to ₹25,111 crore.

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