Oil prices can be reined in

Skyrocketing prices of petrol and diesel (in some states such as Rajasthan, petrol has hit the Rs 100 per litre mark) has led to a war of words between the ruling dispensation and the Opposition.

While the former has put the blame squarely on the erstwhile UPA regime for not doing enough to increase domestic petroleum production, with Prime Minister Narendra Modi himself leading the charge, the latter says the “steep increase in central excise duty (CED) under Modi” is the real culprit.

Currently, India imports nearly 85% of its crude oil requirement, making it perennially vulnerable to rising international price.

Modi’s argument may not be convincing as pricing of oil products being linked to the international price (even domestic refineries are paid for their supplies on this basis), even if the share of indigenous production were to be, say, 50% or even higher, even then Indian consumers would have been paying what they pay today.

Even if the government were to abandon the extant system of ‘linkage with international price’ and let oil companies price the products based on domestic market forces, then also, given the overall deficit situation, it is unlikely that they would have charged any less.

Notwithstanding the above, to blame the spike in pump price entirely on the increase in international price is not tenable either. The pump price is arrived at by adding four components, namely, the ex-refinery price (ERP), freight charges, dealer commission and taxes.

The ERP, in turn, is linked to the import parity price (IPP) and export parity price (EPP) of the respective fuels in the ratio of 80:20. For instance, around mid-February, in Delhi, the price of Rs 89.29 per litre included ERP plus freight: Rs 32.1; CED: Rs 32.9; dealer commission: Rs 3.68; VAT: Rs 20.61.

The tax component of Rs 53.51 per litre alone being 60% of the retail price (in case of diesel, it is 56%), how can the Modi government even think of exonerating itself over the high prices!

It is also not correct to say that this is primarily due to high CED. Out of Rs 33 per litre, Rs 18 per litre is due to the Road and Infrastructure Cess, which is entirely retained by the Centre. Of the balance Rs 15 per litre, it retains 59% or Rs 9 per litre and gives the rest to the states (41% under the 15th Finance Commission devolution formula).

On a net basis, therefore, the Centre gets Rs 27 per litre, while almost an equivalent amount, Rs 26.6 per litre, goes to the state, thereby implying that both the Union government and the state are equally responsible for the high prices.

Finance Minister Nirmala Sitharaman has opined that bringing these products (besides crude, natural gas and ATF) under the Goods and Services Tax (GST) can help in reducing the tax burden. Has she thought this through? Can it be done? What is the track record? Let us take up the last question first.

The GST constitutional amendment provided for inclusion of these products in the new system, but the purpose was defeated by branding them as ‘zero-rated’ – a misleading way of saying that they would continue under pre-GST regime. This was prompted by the fear of revenue loss. But the GST Compensation Act, 2017, along with an amendment to this Act, help garner resources by levying cess on goods falling in the highest GST slab of 28% to fund the compensation to the states for the loss of revenue. Yet, the decision to keep these products outside GST in the first place defies logic.

The then finance minister and GST Council chairman, the late Arun Jaitley, had alluded to taking up the inclusion of natural gas in the Council’s 18th meeting, just before the launch of GST. But that did not happen. During 2018 and 2019 also, this issue was on the GST Council’s agenda but was deferred. Furthermore, replying to a question on a TV channel, Jaitley had said that he was “personally not in favour of excluding the aforementioned products.” Yet, the Centre and states decided to exclude them, and the position continues till date.

Now, following the spike in oil prices, both Modi and Nirmala Sitharaman have reiterated the need to include petroleum products under GST. Even if the GST Council decides to put them under the highest tax slab (although by any stretch of imagination, oil and gas products cannot be termed as demerit or sin goods, so placing them in 18% or 12% slab would be more realistic), the applicable tax rate on petrol would be 28%. Against this, the current tax rate is a whopping 167% (53.51/32.1x100)!

Both the Centre and the states will shudder at the very thought of reducing the tax to a mere one-sixth of what they are collecting currently. They need to put their heads together to see how tax revenues from other sources can be boosted as bringing petroleum products under GST cannot be indefinitely postponed.