The government is looking at slashing the excise duty on petrol by Rs 5-6 a litre from Rs 14.45 at present as it seeks to insulate the common man from the rising price of crude oil in the global markets. It is also weighing the option of scrapping the customs duty on crude (5% at present). Both measures could be announced in the Budget 2011-12.
The UPA government decontrolled petrol pricing in June last year and since then, oil companies have hiked price five times ? by an aggregate 17% in the Capital. Policymakers are keen to decontrol diesel also, but have so far opted to defer a decision given the high rate of inflation.
Explaining the rationale behind the move to reduce the tax burden on oil industry, an official source said, ?The government could concede some tax revenue and let retailers raise the petrol prices proportionately. The two would offset each other and the consumer price would stay at current levels.?
Tax revenue from fuels has been three-to-four times the subsidy which the government had paid on them in three of the last four years. Almost 40% of the Centre?s indirect tax revenue comes from the petroleum sector.
It may be recalled that in the 2010-11 Budget, finance minister Pranab Mukherjee restored the petroleum taxes to the pre-stimulus levels. This was part of a partial rollback of the stimulus in hid bid to steer fiscal consolidation. The current thinking in the government is to adjust taxes and prevent an increase in retail fuel prices, the source said.
While the cut in excise on petrol would benefit the consumer, experts said unless the 2.5% import duty on petrol and diesel were reduced simultaneously, the zero import duty on crude would only help refiners to keep better margins.
?Duty adjustments have to be judiciously used for providing comfort to the consumer. It would be better if petroleum products are included in the proposed GST so that every entity in the value chain is taxed as per the value addition,? said Deepak Mahurkar, associate director at PwC India.
In June 2008, when global crude touched $135 a barrel, the government removed the 5% customs duty on crude and lowered the customs duty by a similar measure on petrol and diesel to 2.5%.
It also lowered the specific excise duty on petrol by Re one to Rs 13.45 and on diesel by a similar amount to Rs 3.6 a litre. However, in the 2010-11 budget, FM restored the duties to earlier levels. Now, with the crude price still hovering around $90 a barrel, the approach is to cut taxes and assuage the strong anti-government feeling among people struggling with an across-the-board rise in prices of commodities, including fruit and vegetables. Food inflation has shot up to over 18.32% in the week ended December 25, 2010. Although the impact of petrol in fueling inflation is limited, it is feared that any further rise in its price may invite backlash from consumers facing price rise in several other areas. It also aims to prevent dissenting voice from UPA coalition partners, who are worried about the political fallout of higher prices particularly in states where assembly elections are due. A Parliamentary panel too recently asked the government to cut taxes and make fuel more affordable. It also asked the Centre to work with state governments to make sales tax rates uniform. Now, they vary from 18% (in Orissa) to 33% (in Andhra Pradesh). ?While the government is also looking at duty intervention for diesel to reduce under-recovery of oil marketing companies, it would rather wait for inflation to taper down. Besides, the reform agenda of freeing pricing of diesel also needs to be carried out,? said the official. An EGoM set up to monitor price movements is in favour of reducing the customs duty on petrol and pass the benefit to consumers, said an official. After BPCL, IOC and HPCL raised the price of petrol last month, international crude price has increased further, necessitating a further increase in retail price of petrol.