No case for continuing with high fuel taxes


By DM Deshpande

Petrol and diesel prices are on the rise again. True, international oil prices are going up too and therefore, Oil Marketing Companies (OMC’s) need to hike the rates. But the global oil price is still at two-thirds the pre-COVID- 19 level and we seem to have reached or even surpassed those levels in some states.

Brent crude is at the level of around US $40 per barrel whereas at the end of January it was at US $60 per barrel. At the time of writing this, it is the 19th day of a straight hike in oil prices since June 7. The OMC’s restarted daily pricing of petrol and diesel after more than 80 days of constant rates due to lock down and Coronavirus.

As a result of the daily hike, diesel is now costlier by Rs 10.63 per litre and petrol by Rs 8.66. Traditionally, the retail price of petrol has always been higher than petrol in India. During the administered price regime petrol would cost almost twice the rate of diesel although both are crude oil products. After reforms both products reflect the economic cost of refining and the difference has narrowed substantially.

It was believed by the government that petrol is used by the affluent class and hence higher price is justifiable. This was a clear case of questionable public policy. However, with proliferation two-wheelers, nearly half of the petrol sold in the country is used by this middle class category. On the contrary cheaper diesel is mostly consumed by expensive SUV’s` driven by rich class. It is for the first time in history that diesel is more expensive than petrol though this has happened only in Delhi.

After the onset of the pandemic, world oil prices crashed in March/April 2020. In the US oil futures went into negative zone for a brief while as there were no takers since storage capacity was all filled up. Since then, lock downs are being lifted in several parts of the world and demand for oil has picked up smartly. In order to take advantage of low ruling prices then, the central government increased excise duty by Rs 13 to Rs 16 per litre and almost all states too, hiked VAT on oil.

According to Care Ratings, this is the steepest rise in duties by the central government; total tax on base price of petrol works out 270 per cent and on diesel 256 per cent. It did not hurt much then because all economic activity had come to a standstill for more than two months and retail demand for oil was nearly zero.

But now spiralling oil prices is hitting both the economy and consumers. When the prices were flooring, even the economists supported the government’s idea of hiking duties. This was supposed to provide a cushion when prices start rising again. Oil prices never keep falling for a long time; they will rise sooner than expected. But governments rarely roll back hikes in taxes; so the consumer is always at the receiving end. “Heads I win tails you lose’ cannot be an acceptable principle. As a result, reforms are getting a bad name.

Decontrolled oil prices ought to mean that they rise and fall in tandem with similar changes in world oil markets. Petro taxes are treated as cash cows by governments. Especially in a situation like the present one when governments’ revenues have taken a massive hit. But consumers’ incomes too have taken a hit. Layoffs, pay cuts and redeployment have taken their toll. Their case for relief is even stronger since governments have institutional arrangements to tackle crisis situations. While governments’ intervention once in a while for prudent fiscal and economic reasons is justifiable, constant tinkering with duties to artificially keep up prices forever is not good.

   Just in a matter of two- three weeks, oil prices rose by 15 per cent. Goods transport by trucks is one of the important indicators of the beginning of normal activity and economic recovery. With higher diesel prices the cost of transport has gone up. Truckers are already operating on thin margins. There is scarcity of drivers due to the spread of pandemic. There is no money to pay higher salaries or incentives to drivers who are willing to take the risk and report to work. While recovery is stalled, it sows seeds for impending inflation due to shortage of supplies of even essential goods.

At present, nearly 63- 64 per cent of the retail oil price comprises taxes, road cess etc. This needs to be capped at no more than 50 per cent. By doing so, interests of all stakeholders including consumers would be taken care of. The central government now needs to work on a road map to bring oil under GST.

Such high levels of taxes by both centre and state is not conducive for ushering in this important reform measure. Therefore phased lowering of taxes is in order. It will also help kick start the economy and also help dousing fears of impending inflation.

The author has four decades of experience in higher education teaching and research. He is the former first vice chancellor of ISBM University, Chhattisgarh.