Rational tax policies needed for oil products

Sushma Ramachandran

Senior Financial Journalist

The recent cuts in excise duty on petrol and diesel are a welcome but long overdue measure. They have triggered a round of matching reductions in value-added tax (VAT) on oil products in states ruled by the Bharatiya Janata Party and even had a ripple effect on Opposition-ruled states. Punjab has also bit the bullet, while others are reported to be considering similar moves. In other words, the hackneyed method of extracting revenues from the golden goose of oil is partially being rolled back by both the Centre and the states.

The heavy taxation on petroleum products may have been led by the Centre, but the states have not been far behind in levying onerous duties. It is, thus, no surprise that the proposal to bring petroleum products under the purview of the Goods and Services Tax (GST) is a non-starter. The GST Council recently considered the proposal owing to a directive from the Kerala High Court, but the response was a predictable negative.

The reason is simple. Both the Centre and states stand to lose a huge amount of revenue if petroleum products are brought within the ambit of GST. Prior to the excise and VAT cuts, taxation of petrol and diesel comprised about 66 per cent of the pump prices. In contrast, the highest tax slab under GST is 28 per cent. Even at this level, the revenues will have to be shared between the Centre and states. This would be a body blow for their finances, as an estimated Rs 5 lakh crore is raised from oil products annually. About Rs 2 lakh crore goes to the states. Given the resources involved, neither the Centre nor the states are keen to cede this cash cow to the GST framework, though the government publicly maintains it would be desirable to do so.

The net result is that India ranks among countries with the highest level of taxation on petroleum products in the entire world. It is on a par with the developed countries of Europe in this respect. In the UK, for instance, taxes on petrol comprise 71 per cent while duties on diesel comprise 68 per cent, respectively, of the retail rates, according to an EY India study. Even in the Netherlands, taxes constitute 69 per cent and 56 per cent of the retail prices for petrol and diesel, respectively.

This data is quoted by government spokespersons to justify the inordinately high taxation of petroleum products. But this is not a developed economy where per capita incomes are sufficient to bear such costs. The existing pricing of fuels imposes a crippling burden on consumers, especially those belonging to the vulnerable segments of society. The recent repeated hikes in cooking gas prices have hit these segments hard in both urban and rural areas.

In this regard, one must mention the Ujjwala scheme which has achieved commendable results in terms of shifting household fuel use from polluting wood and coal to the cleaner LPG. The lacuna has been that after the first free cylinder, the user often is not able to afford paying for fresh cylinders and regresses back to the traditional fuel system. By hiking the cylinder prices, the government is aggravating the problem. It would, indeed, be worthwhile to carry out studies to determine whether the higher cost of cooking gas cylinders has led to a decline in offtake by domestic users.

In this context, one must mention the philosophy of enhancing taxes on transport fuels as a way of reducing consumption as well as harmful carbon emissions. Some developed countries feel this is the way to go, apart from the benefits of mopping up higher revenues from such taxes. But such an approach has little relevance for India where higher taxation is not likely to result in a shift to transport modes fired by renewable sources of energy. These, such as electric vehicles, are costly here and still far from becoming mass consumption items.

It would be wiser, therefore, to gradually shift to a more benign taxation regime for petroleum products, especially as these will have to give way to more eco-friendly energy sources in the long run. The latest round of duty cuts, however, has little to do with any long-term strategies. The short-term focus is clearly to appease the electorate in poll-bound states. Consumers facing transport fuel prices of over Rs 100 per litre are likely to take their ire out at the ballot box.

Apart from the surging fuel prices, there has been a cascading inflationary impact on all goods. Fortunately, a moderation in food prices has ensured that headline inflation was contained at 4.35 per cent in September compared to 5.30 per cent in the preceding month. But with global oil markets on fire and prices ranging around $83 dollars per barrel, there will be a continuing rise in fuel inflation.

The sop for the polls would not have been possible, however, if there was not enough cushion on the revenue front. The faster-than-expected economic recovery has led to a spurt in direct taxes of about 74 per cent in the first half of the year. Even accounting for the low base, it reflects an overall revenue buoyancy. Similarly, GST collections surged to a record level of Rs 1.3 lakh crore in October. The exchequer is, thus, in a better shape than was expected at the beginning of the current fiscal when the second wave took a disastrous toll of lives and livelihoods.

It is, thus, time for the Central government to make a few more sacrifices on the revenue front. The excise duty hikes during the pandemic period — Rs 13 and Rs 16 per litre for petrol and diesel, respectively — need to be rolled back fully rather than partially, as has been done by the Rs 5 and Rs 10 per litre cuts. The burden is growing on not just the consumer, but also the entire economy as inflationary pressures may force the central bank to shift its focus from growth to price rise.

The excessive tax burden on the oil sector was a desperate measure born of desperate times. The economic scenario is clearly brighter now and the altered situation needs to be used to bring rationality into the petroleum taxation policies.

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