There has lately been a lot of discussion on whether the price of fuel will be hiked or whether consumers?aam admi (the vote bank)?will again benefit from the ongoing politics of oil, which has so far succeeded in insulating them from the impact of unprecedented international oil prices. Global crude is close to touching the $100-a-barrel mark and even the Indian basket of crude has touched an all-time high of $87.85 a barrel.
While there is no denying that domestic prices of petroleum products will have to be increased as their continued mismatch with international oil prices is unsustainable. However, very little has been deliberated and debated on the ?windfall gains in revenues? accruing to the government from unprecedented variations in the international price of crude.
The contribution to the exchequer from petroleum products has been steadily increasing, both for the Centre and the states, even though the price of sensitive petroleum products?petrol, diesel, LPG and kerosene?have been moderated.
There was a Rs 20,356-crore increase in revenues to the exchequer in 2006-07 at Rs 1,55,923 crore, compared with Rs 1,35,567 crore in 2005-06. Out of the revenues generated by way of central taxes of Rs 93,802 crore in 2006-07, excise duties alone contributed as much as Rs 51,922 crore. Even in the current year, revenue from petroleum products will increase further due to volume increases.
Witness what the expert committee headed by C Rangarajan on the pricing of petroleum products had to say in its report. On this issue, the Rangarajan committee was of the view that ??imposing ad-valorem duties during a time of persistent price increase is debatable. Not only do ad-valorem levies exacerbate the burden on the consumer, but they also result in the government willy-nilly benefitting through higher tax yields making it vulnerable to criticism of ?profiting at the expense of consumers?. There is, therefore, need for both softening and smoothing the impact on the consumers of international price variations and for the government sacrificing ?windfall gains? in revenues.?
Currently, excise levy on petrol and diesel is a combination of ad-valorem and specific rates. The excise duty on petrol comprises an ad-valorem component of 6% along with a Rs 13-per-litre specific duty, which works out to about Rs 15 a litre. Excise duty on diesel is 6% ad-valorem plus a specific duty of Rs 3.25 per litre, which works out to Rs 5 a litre. This is inclusive of the cess for road construction. However, there is an education cess of 3% on top of this.
The petroleum ministry-related standing committee of Parliament, too, recommended the removal of the ad-valorem component of excise on petroleum products. Considering this, the petroleum ministry has already proposed that the ad-valorem component of excise duties be eliminated, thereby reducing excise duties by Rs 2 a litre on both products.
There appears little indication of crude prices softening and with winter approaching, the likelihood of prices falling appears remote. India imports about three-fourth of its crude to service domestic demand. With the cost of crude constituting a substantial part of the cost of final products, excise duties and taxes also have an equally important role in domestic prices.
High excise duties are inconsistent in the current scheme where on the one hand the government provides compensation to oil marketing firms (IOC, BPCL and HPCL) and on the other levies high excise duty on petrol (Rs 15 a litre) and diesel (Rs 5 a litre). Keeping this principle in mind, the government had earlier eliminated excise duties on both PDS kerosene and domestic LPG. Perhaps there is a case to lower taxes on petrol and diesel.
Should high international oil prices continue, the oil marketing firms will incur extensive under-recoveries in 2007-08?projections are close to Rs 55,000 crore. Of this, Rs 26,363 crore relate to the first half of 2007-08 for which bonds of Rs 11,257 crore have already been promised.
The projected under-recoveries, which were indicated to the Cabinet for the second half of 2007-08 at Rs 28,572 crore for issuance of oil bonds, has jumped to Rs 34,891 crore based on the latest projections. The total under-recoveries projected for the whole year, at current prices, is Rs 61,254 crore. Consequently, the quantity of bonds will also increase. However, in spite of all the initiatives to bring down the burden on OMCs, the projected burden of under-recoveries has risen. Therefore, there is a strong case to rationalise excise duties.