Pricing mechanism behind petroleum

What is the issue?

Petroleum prices are rising and there are considerable demands to the centre to reduce its excise duties on the product.

How the sector was deregulated?

• Being a basic intermediate good, it is operated through a special oil pool account funded by the surplus of ONGC and the refining companies, as well as direct government subsidies.
• Being an ideal commodity for indirect tax, high Central excise duty and high sales tax rates by the states at the retail level were levied.
• With the rising trend in international crude oil prices the subsidy burden of the oil pool account began to mount.
• There were demands that the oil market should be deregulated.
• But the excise revenues from oil was substantially larger than the subsidies provided by the centre.
• Also, the surpluses of petroleum mining and refining companies were substantial enough for cross subsidisation of the loss-making retail oil companies.
• But the entry of private players like Reliance and Essar into the retail trade made cross-subsidisation untenable.
• Thus the administered Price Mechanism for petroleum was dismantled and market pricing mechanism was allowed.

What was the consequence?

• The Centre chose to increase the excise duty on petrol and diesel, although OPEC prices showed a downward trend.
• The hike in excise duty was 380 per cent for diesel and 120 per cent for petrol between 2014 and 2017.
• The C&AG Report has observed that the huge increase in central excise collection from petroleum products (2015-16) was due to a sharp increase in per unit tax on petrol and diesel.
• The excise duty revenue of the central government from petroleum products which was Rs.88600 crores in 2013-14 peaked to Rs.2,53,254 crores in 2016-17.
• Never has indirect tax on any commodity witnessed such a sharp escalation as on petroleum products.

What is the present scenario?

• The international prices crude oil began to rise from late 2016.
• Yet the Centre refused to reduce the excise duties and prodded oil companies to raise their retail selling prices.
• The Centre fears an adverse impact on fiscal deficit, if any additional revenue from petroleum productsgets lost.
• The depreciating rupee also added to their woes.
• However, rising fuel prices are stoking an inflationary fire and imposing an unbearable burden on the people.

Should the states be held responsible?

• States are benefiting from petroleum price escalation through higher devolution after the 14th Finance Commission award in the share of central excise duty.
• However, only basic excise duty on petrol and diesel is shareable with the States and others are outside the divisible pool of taxes shareable with the States.

• Also, VAT rates has been hardly increasedin recent years and even some states have already reduced VAT rates to moderate the current price escalation.

What should the centre do?

• The centre argues that it keeps a substantial portion outside the shareable pool for its obligations on social sector spending.
• There is no established connection between higher duties on petroleum products and social sector spending.
• A demand has also been made that petroleum products be included in the GST.
• But before it gets into reality, a compensation package has to be finalised as per the GST compensation law.
• This would make the present compensation cess to be inadequate.
• Thus the solution is for the Centre to immediately roll back its excise duty spikes.

Source: Business Line