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  1. Rising fuel prices: Not tax cut, Centre for ‘long-term’ solution

Rising fuel prices: Not tax cut, Centre for ‘long-term’ solution

The recent spike in crude prices is attributed to series of factors including Opec production cut and geopolitical situations in countries like Venezuela, Libya, Nigeria and Iran. Also, HPCL’s Surana said, the demand increased compared to last year.

By: | New Delhi | Published: May 24, 2018 6:17 AM

As global oil prices continued to be at elevated levels, the Centre on Wednesday seemed to be not opting for an immediate cut in the excise duties on petrol and diesel whose prices have reached new highs. It is keen to take the state governments on board for a plan to bring these fuels under the goods and services tax (GST).

Addressing the media here, telecom minister Ravi Shankar Prasad said the government was in the process of finding a “long-term, structured” solution to the issues arising out of the volatility of crude prices. “There is a compelling need to find such a (long-term) solution,” he said, adding that ad hoc measures weren’t actually desirable. In what reflected the government’s disinclination to cut the excise duties on petroleum products, the minister said the revenue collected is used for building highways, digital infrastructure, medical institutes, etc.

Hindustan Petroleum Corporation (HPCL) chairman and managing director MK Surana said on Wednesday that one of the ways to rein in the auto fuel prices was to review the taxation structure. “The long-term solution before the country is to bring all petroleum products under the GST,” Surana said.

However, analysts have pointed out that even the highest GST rate of 28% won’t suffice for any semblance of tax neutrality with the current regime.

Currently, around 47% of the retail petrol price and roughly 40% of retail diesel price are due to taxes. The central excise is now 25.4% of the retail price of petrol in Delhi while state value-added tax’s (VAT) share is 21.3%.

However, analysts have pointed out that even the highest GST rate of 28% won’t suffice for any semblance of tax neutrality with the current regime.

Currently, around 47% of the retail petrol price and roughly 40% of retail diesel price are due to taxes. The central excise is now 25.4% of the retail price of petrol in Delhi while state value-added tax’s (VAT) share is 21.3%.

Apart from the rising global crude price (Indian basket is threatening to hit $80 per barrel against below $44 a barrel on June 22, 2017) and the assorted taxes levied by the Centre and states, increasing dealer commissions too have inflated the retail prices of auto fuels. For instance, while the average retail selling price of diesel in Delhi was Rs 57.20 a litre in May 2014, the dealer commission was Rs 1.19 per litre or 2% of the retail selling price; in May 2018, the fuel’s retail price in the city is Rs 67.77 a litre (average) and the dealer commission is Rs 2.53 a litre, or 4% of the retail price. The commission is clearly increasing faster than the overall price rise.

Petrol and diesel prices touched new highs of Rs 77.17 per litre and Rs 68.34 per litre, respectively, in Delhi on Wednesday. Mumbai prices were highest in the country at Rs 84.99 per litre for petrol and Rs 72.76 per litre for diesel. While Delhi charges a VAT of 27% on petrol and 17.27% on diesel, the rates are as high as 39.78% for petrol and 24.84% for diesel in Mumbai.

It is estimated that every $1 increase in crude price demands an increase of around 63 paise per litre in the prices of both diesel and petrol, and a Rs 1 depreciation against the dollar requires a 50 paise increase in the prices of these fuels.

The recent spike in crude prices is attributed to series of factors including Opec production cut and geopolitical situations in countries like Venezuela, Libya, Nigeria and Iran. Also, HPCL’s Surana said, the demand increased compared to last year.

The prices of Brent crude was hovering around $79.19 a barrel, while the Indian crude basket price was at $78.10 a barrel on Wednesday. Surana sees no immediate trigger that can bring down international prices in the near future. “We will be happy to have it (crude price) at around $60-70 a barrel. Today, we are able to partly take care of the sudden spikes in international markets as we take a 15-day average to determine Indian prices,” he added.

However, Morgan Stanley in a recent report said it expected crude price to go up to $90 per barrel in 2020. Since the prices of fuel have been deregulated and daily price changes have been implemented, oil marketing companies use a formula to arrives at the daily prices, taking into account the rolling 15-day average product prices in the international market.

Moody’s Investors Service in a note on Tuesday expressed concerns that India’s fuel subsidy bill is set to increase with the risk of government urging the upstream companies such as ONGC and Oil India to share the burden, a practice discontinued in June 2015. At one point, these companies had borne as much as 40% of the country’s annual subsidy bill. But the threat of an increase in the government’s subsidy expenditure is mitigated by the fact that the two key auto fuels would remain decontrolled and the LPG and kerosene subsidies are relatively small.

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