Petrol and diesel pricing is a complex issue in India because it’s heavily affected by Value Added Tax (VAT), excise duty and international crude oil prices. VAT is a consumer tax added to a product at every point in the supply chain where value is added. The price of petrol and diesel also includes a base price that reflects the cost of international oil, Central Excise Duty, and State Tax (VAT). Interestingly, these central and state taxes form a significant portion of the fuel prices in India.
Petrol and Diesel Prices in Different States
The Prime Minister’s plea to several Opposition-ruled states like Maharashtra, West Bengal, Telangana, Andhra Pradesh, Tamil Nadu, Kerala, and Jharkhand, to reduce VAT on petrol and diesel to ease the economic strain on citizens exemplifies the impact of such taxes on fuel pricing. Despite the Centre’s reduction of exercise duties on petrol and diesel in November 2021, the prices remained unaffected due to a recent surge in global crude oil prices triggered by the Russia-Ukraine war.
Components of Retail Prices of Fuel
Retail prices of petrol and diesel comprise mainly three components: base price, Central Excise Duty, and State Tax (VAT). The base price is aligned with the international oil cost, while Central Excise Duty is uniform across India. Meanwhile, state taxes can vary based on different rates levied by respective state governments. This variation leads to fuel being more expensive for consumers in certain states.
Government Earnings from Fuel Prices
Exercise duty and VAT on fuel are vital revenue sources for both the Centre and states. Budget 2020-21 reports indicate that Excise duty on fuel comprises about 18.4% of the Centre’s gross tax revenues. Petroleum and alcohol contribute to 25-35% of states’ own tax revenue. During April-December 2021, taxes on crude oil and petroleum products generated Rs 3.10 lakh crore for the central exchequer, including excise duty of Rs 2.63 lakh crore.
Challenges for States in Reducing Fuel Taxes
States face constraints in lowering fuel taxes due to their dependence on petroleum and liquor for roughly a third of their own tax revenue. Impact of the pandemic has also led to increased spending needs and reduced revenues, making it challenging for states to relinquish a part of this revenue derived from fuel taxes.
Possible Remedies for Inflation Control
Lowering taxes on finished products or reintroducing subsidies are two potential strategies to mitigate energy price inflation in an import-dependent country like India. However, these options are not devoid of challenges. Monetary tightening may prove beneficial due to higher fuel prices leading to costlier transportation and thereby affecting prices of other items.
Moving Forward: Alternate Strategies and Measures
India is exploring diverse sources for oil and gas imports, creating strategic oil reserves, blending ethanol with auto fuel, and fostering electric mobility plans. Although these initiatives have not yet achieved substantial impact, reducing taxes and limiting dividends from oil public sector undertakings can help control rising fuel prices. Restricting the export of fuel and other petro-products could compel refineries to sell their output domestically, removing trade-parity prices guarantees.
The article also includes previous year questions from the UPSC Civil Services Examination related to global oil prices and Brent crude oil for reference.