The continuous increase in the prices of petrol and diesel is putting a lot on the pocket of the common man of India. Accusing previous governments of this, Prime Minister Narendra Modi has highlighted the country’s dependence on energy imports as the major reason for the current spike in fuel imports. Currently, imports account for 89% of the country’s total crude requirement, while for gas it is estimated at about 53% . This makes India always vulnerable to volatility in the international crude market.
Petrol and diesel prices are increasing daily and have touched all-time high now. Government of India always blaming it on rising international crude prices. Which is complete eyewash.
What are the reasons for the hike in petrol and diesel prices ?
There are 2 major reasons for the current hike in fuel prices – rise in international crude prices & higher central and state taxes. During the covid epidemic, the central government raised excise duty on petrol to Rs 32.98 per liter to Rs 19.98 per liter. A similar increase was effected on diesel, where excise duty was increased from Rs 31.83 per liter to Rs 15.83 per liter. Many state governments also increased the Value Added Tax (VAT) on fuel during the same period.
Today, total taxation on petrol is 200% and on diesel, it is 175%. Petrol and diesel are essential commodities for transportation, and hence their demand is inelastic. So, howsoever, even when prices go up there is very little impact on demand. Exactly this characteristic is cashed on by central and state government and they merrily increase taxes on both commodities considering them as a milking cow.
Why are crude prices rising?
The international benchmark Brent crude was seen at $ 65.09 a barrel on 18th February, compared to a historical low of $ 19 a barrel in April 2020 when global demand dropped due to the COVID-19 epidemic. The Organization of Petroleum Exporting Countries (OPEC) and affiliates, including Russia, cut oil production by 9.7 million barrels per day (bpd) in May 2020, to push crude oil prices amid lower demand. To further boost prices, Saudi Arabia decided to cut production by 1 million barrels per day through February & March this year. This reduction is considered as a major catalyst for the rise in crude oil prices, which is associated with an improvement in demand. Major consumer countries like India have already urged oil producers to reduce crude oil production cuts to provide relief to the price-sensitive Indian consumers on the fuel front.
What are the major components of fuel pricing in India?
Fuel price includes various components like freight charges, dealer commission, central excise duty and VAT.In Delhi, taxes contribute to around 60 percent of the petrol price and 55 percent to diesel charges. The petrol price charged from the dealers in Delhi, including the freight charges, comes to only Rs 32.10 a litre, which means that the duties and dealer commissions contribute the remaining part.Similarly, the price charged from the dealers on diesel works out to around Rs 33.71 a litre. In Delhi, the price of petrol was hiked by 34 paise from Rs 89.88 a litre, while diesel was increased by 32 paise to Rs 80.27 a litre on February 18. Out of this, dealer commissions contribute only Rs 3.68 a litre on petrol and Rs 2.51 a litre on diesel.
What are the fuel prices in neighbouring countries?
Early this month, Rajya Sabha MP Subramanian Swamy took a jibe at the central government stating that ‘petrol price in Ram’s India was higher than the price in Sita’s Nepal and Ravan’s Lanka’.Based on data available with GlobalPetrolPrices.com, fuel prices in not just these two neighbouring countries, but even Pakistan and Bangladesh are way below Indian rates. On February 15, the petrol price in Sri Lanka stood at Rs 60.29 a litre, Nepal was Rs 69.01, Pakistan Rs 51.12 and Bangladesh Rs 76.43 a litre. Similarly, the diesel price in Sri Lanka was Rs 38.91, Nepal at Rs 58.32, Pakistan at Rs 53.02 and Bangladesh at Rs 55.78 a litre.The prices of petrol and diesel in India are benchmarked to their international product prices. “Generally, the prices of petroleum products in the country are higher/lower than other countries due to various factors, including the prevailing tax regime and subsidy compensations by the respective countries, ” Petroleum Minister, Dharmendra Pradhan, informed the Lok Sabha regarding a question to the prices in neighbouring countries.
Let us see first central taxation on petrol and diesel
In 2014, when BJP government came to power, central government taxes on petrol were Rs 9.48 per litre and on diesel Rs 3.56 per litre. From 2014 to 2019, the central government increased taxes on petrol and diesel nine times. Actually, they were fortunate enough to see international crude oil prices drastically falling from 2013 level of $110 per barrel to almost $40 per barrel. They never let consumers enjoy a reduction in prices of petrol and diesel due to the reduction in crude oil prices. They just kept on increasing central excise and cess on these commodities.
At the beginning of 2020, central taxation on petrol was 19.98 Rs per litre a that on diesel Rs 15.83 per litre. In March 2020, taxes on petrol and diesel were increased by Rs 3 each. In May 2020, due to pandemic and lockdowns worldwide, crude oil prices crashed below $10 per barrel, but instead of passing these falling prices benefit to consumers, the central government put an additional tax burden of Rs 10 per litre on petrol and on Rs 13 per litre on diesel. As of now, central government taxes on petrol are Rs 32.98 per litre and on diesel are Rs 31.83 per litre.
Maharashtra state government is equally responsible for rising fuel prices. They have 25 per cent VAT on petrol and 21per cent VAT on diesel, over and above this they also have cess of Rs 10 per litre on petrol and Rs 3 per litre on diesel.
It is interesting to know how state government taxes increased in last 5 years. In 2015, the state government imposed Rs 2 per litre on petrol and diesel as drought cess. In September 2016, they increased taxes on petrol by Re 1 per litre. In April 2017, they increased taxes on petrol by Rs 3 per litre . Then in May 2017, liquor shops on highways and in the vicinity of highways were closed due to court judgement and to recover the reduction in revenue from liquor sale, Maharashtra government imposed additional tax of Rs 2 per litre on petrol. Drought was over in 2016, and highway liquor bars reopened in 2018 , but the taxes imposed on that pretext are still there. (This all happened during 2014–19 BJP regime in Maharashtra) At the end of 2019, current government (MVA) was sworn in and in March 2020, they increased taxes on petrol and diesel by Re 1 per litre and in June 2020 by Rs 2 per litre.
Since inception of GST, all governments are promising to bring petrol and diesel in ambit of GST , but both are blaming each other for not bringing these fuels under the GST ambit. If these fuels are brought under ambit of GST by abolishing all other central and state taxes and even if there is highest special rate of 50 per cent GST, still the prices of petrol and diesel will come down to 50 Rs per litre.
Deb's Blog 