Taxation on Petrol and Diesel- UPSC Current Affairs

Why in the News?

In the past few months, retail prices of petrol and diesel have consistently increased to all-time high levels. 

Probable Question:

Examine the reason for High Oil Prices and suggest the way out to stabilise them.

Key Points:

Components of Retail price of Petrol and Diesel

• Public sector Oil Marketing Companies (OMCs) revise the retail prices of petrol and diesel in India on a daily basis, according to changes in the price of global crude oil.
• Retail Prices of Petrol and Diesel are made up of mainly 3 components:
  • Base price (reflecting cost of international oil)
  • Central excise duty 
  • State tax

• In fact, Central and state taxes form a major chunk of the price of petrol and diesel in India. 
• While excise duty is constant for all over India, state taxes (sales tax and value added tax) vary depending upon the rates levied by different state governments. 
• The excise duty levied on petrol and diesel consists of two broad components: 
  • Tax component (i.e., basic excise duty): Only the revenue generated from the tax component is devolved to states. 
  • Cess and surcharge component: Revenue generated by the centre from any cess or surcharge is not devolved to states.  
    • Currently, the Agriculture Infrastructure and Development Cess, and the Road and Infrastructure Cess are levied on the sale of petrol and diesel in addition to the surcharge.  
• The difference in fuel retail prices in the two cities is due to the different tax rates levied by the respective state governments on the same products. 

How are Oil prices calculated?

• Let's take the example of Delhi to understand how oil marketing companies (OMCs) arrive at the final price.
• For Example, at present, a litre of petrol costs Rs 105.41 in Delhi, while diesel is priced at Rs 96.67 per litre.  
  • As per Indian Oil website, the base price of petrol in Delhi is Rs 56.32 per litre. Adding the freight and other charges of Rs 0.20, the price charged to dealers comes out to be Rs 56.52. This is the actual base price for petrol in Delhi. 
  • To this, excise duty of Rs 27.90, dealers commission Rs 3.86 and Value Added Tax (VAT) of Rs 17.13 is added. 
  • Calculating this, we get the retail selling price of petrol in Delhi as Rs 105.41. 
  • However, prices differ across states as the VAT rate charged by the state government varies widely. 

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Reason for High Oil Prices:

• A recent surge in global crude oil prices owing to the war between Russia and Ukraine led to corresponding hikes in the price of petrol and diesel in India too. 
• Retail rates of petrol and diesel are governed by international prices as India depends on imports for meeting 85 percent of its oil needs. 

Impact of Global fuel Prices on India:

• Skyrocketing Fuel Prices: High crude oil prices have contributed to the prices of petrol and diesel setting new record highs across India in 2021.
• Widening Current Account Deficit: Rising oil prices will impact the current account deficit as India imports more than 80% of its oil requirement, but the share of oil imports in its total imports is around 25%.
• Inflationary Trends: The rise in crude prices poses inflationary, fiscal, and external sector risks.
  • According to a report by Bank of Baroda, a 10% increase in crude would lead to an increase of around 0.9% in WPI inflation.
• Impact on Subsidy: The rise in crude oil prices is also expected to increase the subsidy on LPG and kerosene, pushing up the subsidy bill.
• Balance of Payments: The impact of the oil price rise can also be severe on India’s balance of payments.

Way Forward

Fuel under GST

• One, it will ensure that consumers across the country pay the same rate of taxes. 
  • Currently, prices of petrol in Maharashtra are above ₹120 per litre whereas it is ₹15 lower in Delhi. 
  • Such disparity will cease once fuel is moved under GST as all States will be subject to similar taxes.
• Two, the Centre will have to give States their rightful share of taxes collected as the complicated central tax structure will go under GST.
• Three, tax rates on fuel may come down once it moves under GST. Current rate of tax on petrol and diesel (Centre and States combined) amounts to a whopping 75 per cent, much above the higher GST slab applied for sin goods.

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