Petro excise needs reform

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: There are reports circulating that the finance ministry is giving in to the demand of the petroleum ministry to replace ad valorem duties with specific ones. But it is not clear whether, in the process, any concessions in the nature of reduced levels will be made. Probably not! If that be so, then there is not going to be any immediate relief to the consumer by this switch. The real effect will be felt if crude/product prices increase in the future.

So far, the ad valorem rates have enabled the government to shore up revenues like never before, thanks to the rising crude oil prices. Petroleum products contribute around 40% of indirect tax revenues. And, this collection is bereft of any leakage. This is a compelling and easy option for the government to raise revenues. But then, the high global oil price regime has resulted in the government passing on a cascading effect on the consumers. This is unwanted, especially since the sector is already heavily taxed.

A shift to fixed rates of duties will mean lesser price spikes for consumers during times when global prices turn turbulent. This is also politically desirable. It needs to be mentioned that excise and customs duties already have components of specific rates built into them, in the shape of additional duty and special additional duty on excise and additional duty of customs with respect to MS and HSD. Presumably, all these will be merged and rationalised to make calculations easy.

In the past, there was always a strong case to apply rates and taxes in percentage terms, to allow the exchequer to benefit from rising prices. But there have been times when international prices declined, so that levies in the shape of additional specific duties found their way in to supplement reduced revenues.

But continuation of the ad valorem duties indefinitely, particularly when prices are rising, has no justification. It only helps the finance ministry to balance revenues to hide the shortfall from other sectors.