Why India increased duties on fuels as crude oil prices are falling

By: The Telegraph Calcutta
Updated: 17 Dec 2015 08:03 AM
New Delhi: The Narendra Modi government on Thursday raised the excise duty on petrol and diesel - the sixth duty increase since November last year - to raise another Rs 2,500 crore to shore up its revenues.

The systematic duty increases in the transportation fuels mean that consumers have been denied the full benefit of a steep fall in global crude prices in the past year.

Brent crude prices - a global benchmark - have fallen by almost 50 per cent from just over $70 a barrel a year ago to around $38 at present.

While announcing the decision, officials said the duty hike would have no impact on retail prices.

But petrol prices would have been lower by Rs 5.22 a litre and diesel by Rs 2.84 a litre had the excise duty not been raised so many times this past year. Although the government claims the latest excise duty is price neutral, it is not really so and is factored into complex price calculations.

The government had collected Rs 99,184 crore in excise collections from the petroleum sector in 2014-15. The figure was Rs 33,042 crore in the first quarter of the current financial year.

Opposition parties slammed the decision in Parliament, accusing the government of "profiteering" at the expense of the common man. The diatribe forced finance minister Arun Jaitley to respond that the money was needed for development projects.

"It has caused anguish to all of us that in the supplementary list of business, there is a sixth hike in central excise duty on petrol and diesel.... When this government assumed office, the price of crude was around $111 per barrel. Yesterday, the price has fallen to $35 per barrel. In the last financial year, $88 billion has been the savings on the oil import bill," Congress leader Anand Sharma said in the House.

"You are profiteering and not transferring the benefit to people.... This is also about fiscal mismanagement. They (the Modi government) are trying to save this money to cover up where they have failed," Sharma added.

Analysts said global crude prices have fallen by almost 65 per cent since May 2014 when the Modi government took over. But the consumer has seen petrol prices go down by just 15 per cent during that period.

Jaitley defended the government's decision to cap the benefit of the crude price fall for consumers. "One part of the benefit goes to the consumer. The second part goes towards development activities, particularly national highways and rural roads because those who consume petrol and diesel drive vehicles on these roads and they must pay for it. The third part is consumed by the states by way of value added tax (VAT)," he added.

He contended that the Centre passed on 42 per cent of its revenue collections from the excise duty on petrol and diesel to states.

Another small part goes to the oil companies to cover the losses they suffer on their international purchases of oil. "They buy at $80 a barrel; by the time they sell, the price has become $60. At one stage, the loss of the oil companies was as high as Rs 40,000 crore," Jaitley said.

Jaitley said the increase in duty would yield an additional Rs 2,500 crore in revenue during the remainder of the 2015-16 financial year. The decline in the crude prices has allowed the government to raise duties while passing on some of the benefits to the consumer.

The higher duties have raised indirect tax collections at a time direct tax collections are likely to fall below budget estimates and earnings from divestments are paltry.

Officials said the government would continue to look at the option of increasing the duty, if the free fall in crude prices continues to compensate for the lower direct tax collection.

This is the second increase in excise duty in less than six weeks. In anticipation of the hike, oil companies had yesterday announced a cut in petrol prices by just 50 paise a litre and by 46 paise on diesel even though oil prices had slumped to multi-year lows and warranted a bigger cut. If the hike was not on the cards, the price cut for consumers may have been deeper.

Through the previous excise duty hike, the government had mopped up Rs 3,200 crore. For a government which is facing a likely shortfall in direct tax mobilisation, the two excise duty hikes have yielded Rs 5,700 crore.

Jaitley said that some state governments, including that in Bengal, had increased VAT which had consumed the benefits that would have gone to the people.

A petroleum dealer in Calcutta said he was not aware of VAT on oil products in Bengal.

"The sales tax on petrol is 25 per cent and on diesel, the rate is 17 per cent. Both petrol and diesel have a Re 1 cess on each litre. The rates have been prevailing since the Left Front regime," the dealer said.