The boost in petrol cost has come when the economy is turning a corner and inflation is coming down. Government revenues have also began reverting to standard. The argument for greater levies on petrol and diesel, which could have been justified when the crude oil cost was low and consumption declined sharply, is not seriously robust now.
As usual, there is a discussion on what should really be carried out to ease the costs. The Centre feels that the states should really decrease their taxes, which is an ad valorem levy. The states really feel that the Centre has more legroom as it has currently converted taxes into cess, which require not be shared with them. The Centre has pointed to the growing crude cost and produced a plea to OPEC to expand output to decrease costs.
There are 4 elements to this cost: the expense to the dealer, which consists of the crude oil cost and other processing charges, excise duty charged on per unit basis by the Centre, a dealer commission to the fuel station and a VAT imposed by the state. VAT prices differ across states—being outdoors the GST ambit—and accounts for a rather wide variation in costs across regions.
This break-up in cost can be traced back more than the final 3 years.
The expense to the dealer has 3 components: crude oil cost in international markets, exchange price and refining fees, with the initial two exogenously determined. As can be observed, this cost has varied based on these components, but has been in the decrease variety considering the fact that mid-2019. When the crude oil cost was about $65/bbl, the expense went towards Rs 41/litre. But, at present, the crude oil cost of about $60/bbl has an related expense of Rs 32.90, which is comparable to the expense in November 2017 and the two points in 2019. Hence, the argument that the cost is higher simply because of international crude oil costs is not convincing.
The excise price, levied on a per-unit basis, has been in the variety of Rs 18-20 for 2018, 2019 and the initial half of 2020. In June 2020, the price was enhanced by about 65% as consumption had fallen sharply due to the lockdown. The decrease crude oil cost, therefore, did not outcome in a key achieve for customers as the retail cost was maintained at Rs 71-72/litre. Our policy has been that anytime the international cost of crude comes down, the government ramps up its income collections, providing minimal relief to customers.
The commission on fuel merchandise has been practically static, which signifies that petrol dealers make dollars only when volumes of sales boost as their revenue is agnostic to the crude oil cost as effectively as duties paid.
The state contribution to this cost rise is intriguing. For 2017, the successful VAT price for Delhi was 27% and remained the very same till November 2019. It rose to only 30% in 2020-21. Therefore, the NCT did not boost the price substantially, but as the tax was on a greater base provided the way it is reckoned, there was an automatic achieve. Delhi, nonetheless, has a low VAT price. For states exactly where the cost is closer to `100/litre, the successful VAT is upwards of 42%.
Now, there can be robust arguments for each the Centre and states to rationalise their taxes. If excise is lowered and the states do not automatically boost their VAT prices, the state portion of the cost would come down much less than proportionately, and the customer can spend a decrease cost. On the other hand, if the crude oil cost goes up sharply and the tax prices are not changed, the Centre would not advantage whilst states would achieve on the VAT collection as the taxable base rises.
Quite clearly, the economics behind the petrol cost determination is complicated as the tax guidelines are incredibly unique, getting out of the GST framework. For the present, it does look like the government on each sides will stay mainly intransigent in their tax view, which will modify only in case the crude oil cost increases sharply.
The author is Chief economist, CARE Ratings, and author of Hits & Misses: The Indian Banking Story. Views are individual