Taxes by the litre
Indian Express, June 13, 2006
With Assembly elections over, the rising price of crude oil in
international markets has finally hit the Indian consumer. The Left,
to its credit, has done the consumer a favour by insisting that retail
price rises could be avoided altogether by cutting taxes which
constitute more than half the price paid by the consumer. It
essentially argued that the Centre should cut taxes. However, while 38
percent of the petrol price paid by a consumer in Delhi goes to the
Central government, another 17 percent goes the state goverment. So
when Petroleum Minister Murli Deora asked state governments, who would
have mopped up an additional Rs 2000 crore owing to the price hike, to
cut sales taxes, many state governments responded positively.
The Left has a valid point. Of the Rs 43.49 per litre that the
consumer in Delhi was paying for petrol before the hike, the value of
the petrol was Rs 20.42. The central government levied Rs 14.63 (an
excise duty of 8 percent plus a specific tax of Rs 13 per litre) and
30 paisa as education cess. Sales taxes of 20 percent were levied on
the resulting price of Rs 35 which meant that Rs 7.25 went to the
Delhi government. When the value of petrol goes up then both the
exice collected by the Centre and the sales tax collected by the
State go up.
It is unfair that whenever world crude oil prices go up, not only does
the consumer have to pay a higher price for the oil, she also has to
pay additional taxes to the government. The government actually has an
incentive to hike petro prices as it stands to collect
additional revenue. Already, the contribution of the petroleum sector
to the total net excise revenues of the Government is of the order of
40 percent. As the Left has pointed out, to prevent the government
from further 'profiting at the expense of customers' the duty should
be a specific duty without any ad valorem content. The Rangarajan
committee on Pricing and Taxation of Petroleum products has also
recommended that there is a need to shift from the current mix of
specific and advalorem taxes to a pure specific levy. It recommended
that a specific levy of Rs 14.75 per litre for petrol and Rs 5.00 per
litre for diesel may be imposed.
Since sales tax on petrol of between 20 to 34 percent comes on top of
the exice duty, the increase in the oil price leads to a cascading
effect and the consumer now has to pay more taxes to state government
as well. State governments obtain a windfall gain. Since sales taxes
were outside its purview, the Rangarajan committee recommended that
the Empowered Committee of State Finance Ministers for the
implementation of the VAT also be entrusted with the task of evolving
a uniform policy on sales tax levies on petroleum products.
With the latest price hike the government has also accepted other
recommendations of the Rangarajan committee such as a move from import
parity prices to trade parity prices and a reduction in the custom
duties on petroleum products from 10 percent to 7.5 percent. The
recommendation of restricting subsidised kerosene to BPL families
through the use of smart cards will target the subsidy better as well
as prevent malpractise and adulteration of diesel.
After sorting out the taxation issue, Manmohan Singh needs to focus
on how to depoliticise petro product prices. The objective of making
the prices of petrol, diesel, kerosene and LPG market determined, when
it was first attempted in April 2002, was manyfold. It sought to
reduce the subsidy given to these products. It was hoped that bringing
relative prices of petrol, diesel and kerosene in line with costs and
removing cross-subsidies would reduce the incentives to
adulterate diesel and petrol. It was expected that this would also
prevent the move towards inefficient technologies such as diesel
fuelled cars. It was also hoped that if prices move slowly up and
down, it would reduce the shock to the economy which comes when there
is a one time price hike. This would give the economy time to adjust
slowly minimizing the damage. Consumers would accept price hikes more
easily when they saw daily movement of prices in both
directions. Equally importantly, it was hoped that petro product
prices would not longer be a politically sensitive issue.
However, two things went wrong. First, since the owner of the oil
companies continues to be the government, price decisions have remained
with the petroleum minister. It has created the current system where
prices are not raised before an election not to reduce the popularity
of the party in power.
Second, the oil sector continued to be protected through a system of
licences and controls. In the long run the oil sector requires
exposing local oil companies to global competition. At present, a host
of barriers make it difficult for the private sector to import and
sell petroleum products in the country. In the 1990s, India reformed
its inefficient industrial sector - where there were thousands of
incompetent companies - by opening up to imports. The same
prescription now needs to be made for the petroleum sector. We should
focus on opening up the Indian market for petroleum products to global
competition, so that consumers should be able to fully bypass the
rules of the Ministry of Petroleum, if they should want to. This will
shield the Indian consumer from inefficiency of oil companies. It will
put the sector on the path to meaningful adjustment to competition and
efficiency in a globalised setting. Free entry should be allowed in
the sector. Anyone should be allowed to open petrol pumps, buy petrol
from anywhere in the world and sell to customers. This will help
destroy the monopoly of oil companies and force them to work in a
competitive framework. It will also help prevent the government into
forcing policies on them that will push them into the red.
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