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With fuel prices on fire, Centre faces a dilemma over ‘duty’

Twesh Mishra Richa Mishra | Updated on June 17, 2020

Rising expenditure and limited revenue do not provide much leeway for the Finance Ministry

With auto fuel prices seeing an increase for the  10th consecutive day on Tuesday, pressure is mounting on the Narendra Modi government to reduce the excise duty and ask the State governments to bring down the VAT. The tax components  account for over 60 per cent of the actual retail price.

Oil companies, on their part, have been requesting the government to consider deferring the collection of excise duty from them, so that their liquidity position, which has been impacted by lack of demand during the lockdown period, coupled with a steep fall in oil prices, improves.

However, given that this is  one of the few sources of revenue generation for the government, it will be a tough call for the Finance Ministry.

The government had artificially controlled the price for almost 82 days, considering the external factors, such as the impact of Covid-19 on consumer behaviour. But the prices were still on the high side, giving rise to the argument that the benefits of low global prices have not been passed on to  consumers.

Price alignment

From June 6, the oil companies have once again started aligning the retail price with the international price. After  Tuesday’s revision, petrol costs ₹76.73 a litre in Delhi (up 47 paisa from Monday) and diesel ₹75.19 (up  57 paisa), creating a big hole in the consumer’s pocket.

Over 10 days, petrol price has risen by ₹5.47 a litre and diesel by ₹5.80. Without taxes or dealer margins, petrol would  be sold at just ₹22.44 a litre and  diesel at ₹23.23 in the national capital.

Taking advantage of the falling international crude prices — which had gone below $30 a barrel — the government, on May 5, had increased the excise duty on petrol by ₹10 a litre and on diesel by ₹13 a litre. It had said then that the consumer  would not be impacted and that the revenue generated from this  would be used for infrastructure and other development projects.

Sonia Gandhi, Chairperson of the Congress Parliamentary Party, has written to the Prime Minister on the issue, stating that his government is seeking additional revenue of nearly ₹2.60-lakh crore by  ill-advised hikes in excise duty on petrol and diesel.

She said  the Modi government has cumulatively hiked the excise duty on petrol by ₹23.78 a litre and on diesel by ₹28.37 a litre. The Centre is said to have raked in ₹18-lakh crore from excise collection on petrol and diesel alone in six years.

A senior executive from an oil company said though the market is deregulated and pricing is free, this concept works well when things are stable, but it needs a different approach in a volatile market, particularly when the cracks are abnormally low or negative.

“Officially, the price of petrol and diesel is benchmarked to their prices in the international market,” said an analyst at a top brokerage firm.

“This usually gives companies legroom to make a margin on sale of auto fuels in India. But when the international price of petroleum products fell, the domestic companies held back on price revisions. This was topped by an even higher taxation on auto fuels towards the close of Covid-19 lockdowns to help shore up revenues.”

“Domestic oil marketing companies had held back price cuts during the Covid-19 lockdowns, when demand plummeted. They were hoping to make up their losses once demand  picked up again. But the Centre hiked levies on petroleum products and said these hikes would  be absorbed by the domestic public sector oil companies,” the analyst added.

Effectively, these companies ended up in a position where  they were making a loss on auto fuel sales. According to a note by ICICI Securities, the net marketing margin (on both petrol and diesel) in the beginning of June 2020 was around minus ₹1.50 a litre, down from over ₹16 a litre during the first week of May.

Published on June 17, 2020

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