Stung by the Opposition attack on the rising prices of petrol and diesel despite a drastic fall in global crude prices since 2014, the Finance Ministry has eventually reduced the Basic Excise Duty on these fuels by Rs 2 a litre with effect from 4 October. The states have been urged to cut their levies by 5 per cent.

After the cut, the retail prices of petrol and diesel in Delhi fell to around Rs 68.50 and Rs 57 a litre respectively, almost the level of August 2017. From 2010 until mid-2014, world oil prices had remained fairly stable at around $110 a barrel. But since June 2014, the prices started falling, and went below $ 50 a barrel by January 2015. It was due to the snowballing effect of several factors ~ weak global demand due to insipid economic growth, surge in US production and OPEC’s decision not to cut production.

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After touching an all-time low of $ 28 a barrel in January 2016, the price recovered somewhat and is now hovering around $ 50 again. But it has not made any visible change in the prices of petrol or diesel in India; in fact, prices have risen by 8 per cent to 10 per cent in the past two months. Thus while import prices have fallen by more than half, the Indian price has remained more or less the same. This is because of the taxes, levied both by the Centre and the States on all petroleum products.

The Government has been criticised by the Opposition, especially because GST has created inflationary pressures on the economy affecting demand and consumption, and may have slowed down the economy as well. On October 6, the BJP-ruled Gujarat became the first state to announce a cut on VAT relating to petrol and diesel.

Other BJP ruled states, such as Madhya Pradesh, Chhattisgarh, Uttarakhand, and Jharkhand, with the possible exception of Haryana, and states where it shares power, like Bihar, appear likely to do the same. While GST has covered most sectors, the significant exclusions have been petroleum and real estate. The clamour is becoming louder by the day to bring these sectors under GST.

Petrol and diesel prices affect almost every sector and bringing these items under the GST regime can give a real boost to the economy at a time when it is widely perceived to be underperforming. The reforms need to be extended to this sector, and if states could agree on a mechanism to levy GST for oil products and forgo their rights to levy VAT on these products, with a suitable scheme of compensation being worked out by the Centre, the prices of petrol and diesel can come down immediately. But there are formidable constraints and hurdles to be overcome before we can do this, and the solution is not so simple.

The Centre earns a large part of its own revenues not only from excise and customs duty on petro-products, but also from cess on crude oil, from taxes on the profits of oil companies and dividend from oil PSUs. In 2015-16, it collected Rs 2.58 lakh crore from these taxes, which accounted for 36 per cent of the total indirect taxes collected during the year.

This is more than the total Central Government expenditure of Rs 2.04 lakh crore on all centrally-sponsored schemes or the total subsidy of Rs 2.42 lakh crore paid for fertiliser, food and petroleum during that year. In other words, the oil revenue accounts for almost all of Central welfare or subsidy expenditure.

For the states, the petroleum sector contributes between 17 and 26 per cent of the total VAT revenues; they collected Rs 1.60 lakh crore from VAT on petro-products, cess and royalty on crude oil etc. Thus the total contribution of the petroleum sector to revenues of the Central and State governments in 2015-16 was Rs 4.18 lakh crore, or 3.0 per cent of India’s GDP (Tax-GDP ratio in India is around 17 per cent. Despite the latest duty cut, the Centre’s oil revenue is estimated to rise by more than 10 per cent to Rs 2.86 lakh crore in 2016-17.

It is, therefore, only natural that neither the States nor the Centre would agree to bring this sector under GST, and thereby risk losing their discretion to increase the taxes even when the crude prices have fallen worldwide. In August 2017, a litre of imported crude oil cost only Rs 20.19. After taking into account the operational, refining, transportation and marketing costs as well as the margins of oil refining and marketing companies, the basic cost of a litre of petrol came to Rs 29.53. The dealer’s commission of Rs 3.23 fixed the final cost at Rs 32.76 a litre, against its market price of Rs 68.88 (in Delhi).

The difference of Rs 36.12 per litre was on account of taxes ~ Central excise duty (Rs 21.48) and State VAT (Rs 14.64). For diesel, the total cost including dealer commission of Rs 2.17 per litre came to Rs 31.29, and the final market price was Rs 57.06 a litre, after accounting for excise duty of Rs 17.33 and VAT of Rs 8.44 per litre. Thus the total taxes paid on the basic cost presently amounts to 110 per cent for petrol and 82 per cent on diesel. In June 2014, when the crude price was more than $100, the excise duty was only Rs 9.20 per litre of petrol and Rs 3.46 per litre of diesel.

As the prices dropped by more than half since then, the excise duty on petrol has more than doubled, and that on diesel rose by five times. Similarly, the VAT rates on petrol and diesel in June 2014 were respectively 20 per cent and 12.5 per cent of the basic prices. In August 2017, these rates increased to 27 per cent and 16.75 per cent respectively, in addition to cess of Rs 2500 per tonne. Prices vary from state to state as they charge VAT at different rates. Accordingly, the price of petrol varies from Rs 68.88 in Delhi to Rs 78 in Mumbai, and that of diesel varies from Rs 57.06 in Delhi to Rs 60.61 in Mumbai. Given the implication of the petroleum-sector taxes on the revenues of both the central and state governments, it is difficult to bring this sector immediately under the GST regime, as both governments will then have to slash their welfare expenditure, which might have political and electoral consequences.

The petroleum sector receives an annual subsidy of Rs 25000 crore, mainly to subsidise the prices of diesel and cooking gas. Based on the consumption and tax data provided by Petroleum Planning and Analysis Cell, and taking only diesel and motor spirit, a crude estimate of the revenue neutral common rate for these two products works out to Rs 32.95 per litre, including both excise and VAT, in lieu of Rs 36.12 for petrol and Rs 25.77 for diesel at present. This will imply a tax rate of almost 100 per cent on the current basic price of petrol and 105 per cent of the current basic price of diesel after dealer commissions. The highest rate allowed by GST today is 40 per cent, though the highest rate being levied presently is only 28 per cent on goods like tobacco or perfumes. Clearly under the present structure, bringing this sector under the GST regime may not be sustainable if revenues are to be protected.

The roadmap for such an eventuality must be carefully calibrated, first by equalizing the excise on diesel and petrol. Obviously, the price of diesel will then go up while the price of petrol will fall, but it will correct many distortions which afflict the present system, leading to reduced demand for diesel and diesel-driven vehicles and a decline in diesel imports, which will reduce vehicular pollution. This should be followed by making the States agree on a uniform rate of VAT throughout the country, and the rates of both excise and VAT on these products should then be brought down in phases, in slow but sure steps.

The resultant loss of revenue will be compensated by higher volumes of consumption till their ultimate integration into the GST framework. The road will be long, but by eliminating the arbitrariness of the current mechanism open to manipulation by both the Centre and the States, the goal of one common market will be promoted, besides reducing the inflationary potential of the economy.

(The writer is a commentator. Opinions expressed are personal)