The sharp cuts in petroleum taxes would only make a moderate reduction in government?s revenues from the sector as receipts such as dividend from oil companies, corporate income tax and state level levies are more than double the total customs and excise duty collection from the sector, official data showed.
Oil company executives, though relieved by the decision to raise prices and cut taxes, demanded more clarity on the subsidy sharing formula to tackle the remaining losses this fiscal due to high global crude prices. The central government on Friday increased diesel price by R3 per litre, domestic LPG by R50 per cylinder and kerosene by R2 per litre.
?Even after the duty cuts and price revision, an under-recovery of R1,20,000 crore is still to be addressed. Investors keep on asking what the subsidy sharing formula is,? said ONGC chairman A K Hazarika.
ONGC is the largest contributor of oil subsidy among upstream companies, which collectively bore 38% of the total R72,000 crore losses incurred by retailers IOC, HPCL and BPCL last fiscal.
The lowering of the expected losses of retailers this fiscal from R1,71,140 crore has lowered ONGC?s share of subsidy burden somewhat. Hazarika said that the timing and the quantum of the follow-on public offer is a call to be taken by the disinvestment ministry.
Petroleum secretary GC Chaturvedi told FE that the ministerial panel that revised the fuel prices has not taken a view on the subsidy sharing formula among the government, the upstream companies and fuel retailers.
Economists, in the meanwhile, suggested that the fuel price increase will result in a 50-60 basis points increase in wholesale price-based inflation immediately while the cascading effects will be visible in the coming months.
?The price increases in diesel, LPG and kerosene, together will add about 75-100 basis points to WPI-based inflation in the next few months,? said Crisil director D K Joshi. Inflation continued to be at a disturbingly high level of 9.48% for the month of May, compared to 10.48% the same time a year ago.
Petroleum minister S Jaipal Reddy said on Friday the government will lose R49,000 crore on account of the 5% customs duty cut on crude oil and on finished products and on account of the R2.6 a litre excise duty cut on diesel. After the cuts, crude still attracts a R2,500 per metric tonne cess levied as central excise duty, and a R50 per tonne levied as the national calamity contingency duty.
Petrol still bears a specific import duty of R14.35 a litre customs duty, while diesel bears R4.6 a litre. Reddy urged state governments to lower sales tax because it generates revenues to state governments more than the central excise does to the Union government. In 2009-10, for example, petroleum sector contributed sales tax/Vat of R65,000 crore, whereas central excise was only R62,480 crore.
It is interesting to note that in 2009-10, for which data is available, excise and customs duty on petroleum accounted for only one third of the total revenue accrued to both the centre and the states from the sector at R1,83,860 crore. The major components include royalty, corporate tax, dividend, tax on dividend, profit petroleum, service tax, Vat and octroi. The total revenue from the sector is also three to four times more than the oil subsidy given by the centre.
The government wants to reduce subsidies on food, oil and fertilisers to 1.5% of the GDP in the current fiscal. Subsidy on these three items had touched 40% of the government?s revenue receipts (3.9% of GDP) in the crisis year of 2008-09, but it has been brought down to 20% of revenue receipts last fiscal.
Now the target is to further reduce it to 17% of revenue receipts this fiscal, for which an increase in fuel prices was essential.
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 marginally lowered the specific excise duty on petrol by R 1 to R13.45 and on diesel by a similar amount to R3.6 a litre. However, 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 his bid to steer fiscal consolidation. Crude oil, which was on an average $85 a barrel in the last fiscal, however, has been ruling at an average of $113.6 a barrel in the first quarter of this fiscal, prompting the government to slash taxes again.