Reducing the Price of Petrol & Diesel

Why in news?

The government has currently asked the “Oil Marketing Companies” (OMC) to absorb any increase in crude oil price.

Why hasn’t petrol & diesel prices reduced with curde prices?

• Price of petrol & Diesel now is as highas it was in 2012 even though the crude prices have almost halved.
• During that time, the government used to subsidise consumers and the loss was borne by the government, OMCs and upstream public sector oil companies.
• Eventually the prices started falling.
• But it wasn’t reflected in the market prices as the government kept cutting the subsidies.
• This made the prices reflect the market trends.
• But the current directive to OMCs to absorb increase in price is seen as a policy reversal against de-regulated pricing. 

What can the Central Government do to reduce cost?

• Excise duty is fixed in rupee terms Rs 17.33 per litre for diesel and Rs 21.48/litre for petrol.
• So increase in the cost of diesel or petrol does not increase the revenue of the central government
• It would be unwise for the government to cut the excise duty as it has subsidised the customer for already a long period.
• However the excise duty rates can be made equal for both diesel and petrol.
• It will increase the price of diesel by 2% and reduce the price of petrol by 6%.
• Hence there will be reduction in distortion.

What can the State Governments do?

• VAT Rate - States impose very high VAT on petrol & diesel.
• Since VAT rates are ad valorem rates i.e calculated in percentage terms, their value in rupees increases with increase in prices.
• Whenever the oil price increases, revenues of states also go up.
• Thus, the states should periodically reduce their VAT rates.

• Bringing under GST - Taxes on petrol & diesel constitute a major portion of state revenue.
• So the states insist on keeping diesel and petrol out of GST.
• Even with a high GST rate of 32%, the states’ share of the tax would be around Rs.5 /litre which is much below the current Rs 14,litre of petrol & Rs.21 per liter of diesel.
• So to reduce the prices, all states should have a uniform GST rate for diesel and petrol.

Source: Indian Express