Oil panel pitches for cut in excise duty

Written by Sanjay Jog | Mumbai, Sep 29 | Updated: Sep 30 2008, 07:19am hrs
The Petroleum Planning and Analysis Cell (PPAC) has made a strong pitch for a judicious mix of reduction in excise duties and state taxes, along with a gradual increase in prices to bring the price of automotive fuels at par with international prices. The prices would be determined by the interplay of market forces so that all the players have a level playing field.

The PPAC, which is attached to the petroleum ministry, in its presentation to the Centre and the 13th Finance Commission, has asserted that in this manner, the consumer, too, would benefit by way of competitive prices and further reducing inefficiencies in the operations of oil companies. This would further compel them to adopt international best practices and global benchmarks for their products & services. According to the PPAC, one way to rationalise the pricing structure could be to reduce taxation on petrol and diesel, which is quite high at present. Taxes constitute 45% and 25% of retail selling prices of petrol and diesel respectively, in Delhi. If taxation levels on petrol and diesel could be reduced, oil companies would improve their financial position by passing on a part of the burden of international prices to the consumers. If excise duty is reduced by Rs 2 per litre each on petrol and diesel, the impact on government revenue is estimated to be around Rs 16000 crore.

Further, the PPAC has called for a reduction in VAT. Unlike domestic LPG, which attracts a uniform VAT of 4% across all states and union territories, on account of being placed in the declared goods category in the Central Sales Tax Act, the VAT on petrol and diesel continue to be levied at different rates in different states, which distorts the pricing mechanism. VAT collection from the oil sector contributes roughly a third of the revenue of the state governments. Heavy VAT burden on oil products lead to a high degree of cascading effect on prices. The state governments need to reduce the rate of VAT on automotive fuels. Perhaps, the empowered committee of state finance ministers led by the West Bengal finance minister, Asim Dasgupta, could be asked to look at this subject, for evolving a uniform policy on VAT levy on petroleum products, the PPAC said.

An important step involves the levying of irrecoverable taxes, called irrecoverable since they cannot be recovered from the consumer. The ideal solution would be to persuade the state governments and local bodies to withdraw such levies, if possible, in view of their distortionary impact on prices. Alternatively, they could be encouraged to replace the entry tax / octroi duty by a surcharge on VAT on finished petroleum products, with the state governments transferring a part of the revenue to the local bodies.