What ails the Lahiri panel recommendation on petro-tax

Updated: Jan 27 2005, 05:30am hrs
With the government reworking the taxation regime for petroleum products in the forthcoming Budget, the finance ministry-appointed Lahiri Committees recommendations on petro-taxation could very well form the basis. An analysis of the committees recommendation shows that the taxes are inequitably distributed and the consumer will end up paying more for petro-products.

Lies, damn lies and statistics!

At a fiscal level, the committee has sought to reduce the customs revenue from petro-products by Rs 5,000 crore and make up this loss through additional levy at the excise end. The first issue here is whether this exercise is reliable or not

Perhaps not for the following reason:
Customs duty is largely realized on crude and the levy is on an ad valorem basis. This means that customs collections rise and fall in tandem with the global crude price. The excise levy, on the other hand is on petro-products, which attract both an ad valorem component as well as a fixed component. The ad valorem duty is computed on the basis of the global product price. However, since the global crude and product prices do not necessarily move in tandem there is no robust trend to rely upon.

Hence, the fine-tuning of duty structures on the above basis is not a desirable means to restructure the tax rates. Also, the diesel consumption assumed by the committee does not capture the annual growth in demand! This additional consumption could net the exchequer around Rs 700 crore, to be paid for by the consumer! So much for the revenue neutral restructuring of taxes suggested by the Lahiri Committee. In fact, the report states that there will be a revenue shortfall of around Rs 121 crore!

Inequitable distribution of taxes:
The petroleum sector is saddled with multiple tax rates. However, it is interesting to study the committees recommendations in the backdrop of its enunciated principle the tax system should be progressive with the rich shouldering a greater part of the tax burden and little of it falling on the poor and vulnerable.

The committee has recommended an increase in refinery margins on LPG and kerosene, a cut in customs duty on crude oil. These measures will result in a revenue loss of Rs 5,000 crore for the exchequer. This is sought to be made up by increasing the excise duties on mass consumption products like diesel, petrol rather than industrial fuel.

Given that industrial fuels are freely priced unlike petrol and diesel and also the resilient behaviour of India Inc in the face of high product prices, the report has been less than equitable. Rather than reduce the refinery margins on subsidized products (LPG and kerosene) and increase or maintain the current margins on industrial products, the converse has happened.

The refinery margins on industrial fuels which makes up around for 20% of petro-product consumption is sought to be reduced by 5%.

Let us consider the changes suggested in the case of LPG (for domestic use) and kerosene (public distribution scheme).

The customs duty on LPG and kerosene has been retained at 5% each. How does this make a difference

The refinery margins are a function of the difference in customs duty between crude and products. Hence, seen in the context of the customs duty on crude coming down from 10% to 5%, the burden for the retailer goes up since the negative margin is replaced with nil margin!

Interestingly, since government controls retail prices and the marketing network is entirely PSU-owned (which are integrated with the refineries), the only beneficiary of this move will be private refiners who dont retail LPG or kerosene. The only private refiner today is Reliance Industries Ltd, which meets a third of the countrys LPG requirement and a fifth of kerosene demand. The gains for RIL are of the order of Rs 400 crore per annum, assuming an international LPG price of around $400 per tonne and $45 per barrel in the case of kerosene.

On the excise front, while the excise duty on LPG has not been altered, that on kerosene has been reduced from 12% to 4%. This according to the report will result in loss of revenues of the order of Rs 700 crore, a benefit that will be enjoyed by the PSU retailers. Since the PSU are reeling under losses that are several multiples of this figure, it is unlikely that the retailers will pass on the gains to the consumers unless forced by the government!

Interestingly, the Lahiri Committee has worked its arithmetic without eliminating the subsidy distortions, where the publicly listed PSU retailers are bearing an unpaid subsidy burden on account of LPG and kerosene sale.