In this public interest article, JainMatrix Investments ideates on the Oil & Gas sector. In India, currently the retail prices of petrol & diesel are at all-time high. On 16th Feb’21, petrol cost ₹ 89.29/liter in Delhi, while diesel cost ₹ 79.70/L. In some parts of India, like Raj. and MP, petrol crossed the ₹100/L mark for the first time. This is of concern to the retail consumer. There is also a cascading effect of diesel prices impacting transportation, and truck rental and bus / taxi prices are rising.
These products are not covered under GST, which has set tax slabs. The price build-up of petrol can be well understood from Fig 1. Govt. of India (GoI) has increased taxes on petrol & diesel over 5 years, to raise revenues, discourage excessive use & promote usage of environment friendly Electric Vehicles, see Fig 2.
Fig 1 – Price Build up of Petrol, Fig 2 – Excise and VAT (Source ToI)
Volume and Crude price volatility: Due to pandemic effect, the sales volume of diesel reduced by 10 M tons compared to the previous year. Crude prices also fell steeply as global demand fell, see Fig 3. To meet the budgeted FY21 Tax collection of ₹ 16.35 lakh cr., GoI had to raise excise duty on petrol by ₹13/L and on diesel by ₹16/L in two tranches. By Sept-Oct 2020, crude prices rose again, and Indian retail prices have risen to new highs.
Thus the problem is that collection of taxes (state VAT & center’s Excise Duty) is fixed by GoI assuming fixed base prices & sales volume of petrol & diesel. These 2 main factors contribute to petro price volatility: 1) Crude prices 2) Sales volumes.
The Finance Minister has referred to this situation as a ‘Dharam Sankat’. We have a Suggestion.
Fig 3 – Crude Prices (Source: TradingView)
- This problem can be resolved by having monthly resets of Excise and VAT from petrol & diesel.
- Thus the Union Excise Duties budget of ₹ 3.61 lakh crore (assumed from petrol & diesel) can be taken as ₹ 30,083 cr. /month. Similarly states’ VAT.
- Every month, the VAT and Excise charges per liter can be modified to meet the monthly budget, based on last month’s collections, and petro sales volumes. Any monthly variance of collections from budget can be rolled over and made up in next month, so that the budget is achieved.
- Naturally the states and center need to coordinate for the monthly tax reset task. Perhaps the infra is already in place, as PSU firms change prices rapidly when crude prices change.
- This system allows an auto correction of tax levels – excessive tax collection one month results in lower taxability next month so that over 2 months the budget is maintained. And vice versa.
- As the Indian economy recovers, we feel that petro product consumption volumes will rise. The above system will trigger lower per liter prices in this scenario.
- It’s important that the GoI does not excessively tax petrol and diesel, and stay within budget, while also recognizing that petro products are an important way for GoI to control deficits post the covid year.
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