The steep increase in the prices of petrol and diesel by over Rs 3 per liter each post the assembly elections in Karnataka since May 14, 2018 [currently, these are Rs 78 per liter and Rs 69 per liter respectively in Delhi] has yet again led to build up of unprecedented pressure on Modi – government to reduce the excise duty [ED].
Between November 2014 and January 2016, ED on petrol went up from Rs 9.48 per liter to Rs 21.48 per liter or 2.26 times, whereas on diesel, the increase was even sharper from Rs 3.56 per liter to Rs 17.33 a liter – almost 5 times. That coincided with steep decline in the international price of crude oil from a peak of US$ 117 per barrel in June 2014 to a low of US$ 27 per barrel in January 2016.
After January, 2016, the crude moved up gradually to US$ 40 per barrel by December 2016. Since 2017, the price continued its upward march and is currently ruling at $75 per barrel [after having touched US$ 80 per barrel]. This has led to corresponding increase in price of petrol and diesel even as ED remains high at Rs 19.48 per liter and Rs 15.33 per liter respectively after these were reduced by Rs 2 per liter each in October 2017.
In Delhi, out of Rs 78/- that a consumer pays for a liter of petrol, about Rs 38/- is the price charged by oil marketing company [mainly Indian Oil Corporation Limited (IOCL)/Bharat Petroleum Corporation Limited (BPCL)/Hindustan Petroleum Corporation (HPCL)] to the petrol station dealer; Rs 19.5/- ED charged by union government; Rs 3.5/- dealer commission and Rs 17/- value added tax [VAT].
Considering that ED accounts for about 1/4th of the cost to the consumer, reduction in it may appear to be an appealing course of action to give relief to the consumers. But, it is necessary to take a holistic view of the situation keeping in mind the impact on union budget and the implications for fiscal deficit.
During 2016-17, the union government collected Rs 242,000 crore from levy of excise duty. This contributed nearly 50% of the indirect tax collection and about 1/5th of the total tax [direct plus indirect]. This money was used for funding infrastructure projects viz. roads, houses for the poor, highways/expressways, rails, port etc and welfare schemes for the poor on a scale never seen before. The position during 2017-18 was similar.
The government has also saved lot of money by reducing leakages in disbursement of various subsidies viz. fertilizers, food, LPG [liquefied petroleum gas] etc and other financial assistance viz. scholarship, pension etc using direct benefit transfer [DBT] into bank account of the beneficiaries. @ Rs 75,000 crore annually, total saving of Rs 300,000 crore during the last 4 years were deployed for enhanced coverage under the welfare schemes.
The investment in building infrastructure and financial transfers to the beneficiaries/poor have also helped in boosting demand and in turn, spurring growth in GDP at a time when private investment is sluggish, courtesy twin balance sheet problem – highly leveraged balance sheet of corporate and its contagion effect on banks due to increase in their non-performing assets [NPAs].
The resources garnered from ED on fuel [as also those saved by plugging leakages in subsidy/welfare schemes] have thus got inter-twined with implementation of crucial projects. In this backdrop, if ED on petrol and diesel is reduced [a rupee cut would mean reduction in revenue by Rs 13,000 crore annually], this will lead to cut in expenditure. This in turn, will have a debilitating effect on projects and welfare schemes.
At a time when, growth is gathering pace led primarily by government-led investment, it won’t be proper to apply the brakes midstream. The alternative of funding the spend from additional borrowings [inevitable if, ED is reduced leading to less revenue generation], will be equally risky. This is because slippage in fiscal deficit has an associated cost by way of decline in ratings, hike in interest rate and inflation etc.
Asking oil PSUs to charge less from consumers or directing suppliers of domestic crude viz. ONGC/OIL to give a discount on their supplies to the former/refineries won’t be a prudent idea either.
This will erode investor confidence [foreign investors are investing in these undertakings on the basis of ‘transparency’ and ‘predictability’ of their pricing decisions which will be marred if they are told to deviate from the international price parity principle] and has the potential of wiping out their profit. In turn, this will undermine their ability to implement expansion and modernization projects when the country needs more through put to meet the growing demand.
What about asking states to reduce VAT? The VAT amount of Rs 17 per liter includes Rs 11.5/- as VAT applied on fuel price and dealer commission and Rs 5.5/- VAT on ED. The latter – a tax on tax – accounts for 1/3rd of the total VAT amount. During 2016-17, out of total VAT collection of Rs 166,000 crore by the states, the amount garnered by way of VAT on ED was Rs 55,000 crore.
This is a fortuitous gain. Removing this alone would relieve consumers by Rs 3-5.5 per liter depending on the rate of tax in the state. Besides, the practice of levying VAT on ad valorem basis [or as percentage of price] needs a re-look. Under the extant system, the amount of tax automatically goes up with increase in price even at the same rate. So, states have a vested interest in continuing with ad valorem system.
These anomalies can be addressed only by including these fuels under GST [Goods and Services Tax] putting them under the 18% slab initially with the aim of eventually shifting them to 12% slab. Post-inclusion, states should not be allowed to levy tax [call it excise duty or any other name] over and above the GST or else, the purpose of bringing them under GST will be defeated.
Any fear that the states will face loss of revenue is unfounded as there will be huge buoyancy in tax collection due to boost to GDP resulting elimination of cascading effect of tax-on-tax and reduction in logistics cost on one hand and millions of more businesses coming under the tax net.