As Fuel prices hit new highs, time for government to bite the bullet

Resentment is building up against the new highs in fuel prices, stoked by an opposition all too happy to blame the government's high taxes for it. But those taxes are only half the story

As the country grapples with a national strike called by opposition parties today, its a good time to wonder exactly how things have come to such a pass for the government.  But guess what? We hardly see a national movement, or calls to conserve fuel. That is a direct consequence of the government’s addiction, or dependence on fuel taxes today.  Fuel consumption and the taxes on it is literally powering some of the biggest social welfare schemes, and state spending, making a consumption  drop a serious issue of worry for the players now. If that isn’t a moral hazard, then what is?

It was back in 2015-16 that the government, which had been steadily increasing excise duties on petrol and diesel to offset the drop in international prices, first mooted the idea that these were also an implicit ‘carbon tax’ helping fight climate change by making fossil fuels dearer.  However, the least one would have expected from a country merrily imposing carbon taxes on fossil fuels is more serious action on climate change efforts. As it turned out, most of the largesse has actually gone into social welfare schemes.  The renewables sector if anything, has seen withdrawal of subsidies over the past year. To its credit, social redistribution was mentioned as a substantial benefit of the ‘carbon taxes’. As the matter stands today, social benefits aside, the larger consumers of these fuels have precious little to see for the taxes they have paid.

The ever spreading road networks extract ever increasing tolls, even as drivers fret over roads that are actually not yet complete. In an ironical twist, any savings transporters hoped to make from the removal of Octroi barriers following the GST  implementation has been patchy at best, with states finding other ways to extract tolls. ‘Green’ guidelines and fines on top of fuel taxes have only made it clear that at every way, it is the user who will keep paying, and hoping that the government will make the right changes eventually.

The repeated extension of the compliance deadline for the country’s coal power plants is another glaring example of double standards and unwillingness to punish evenly when it comes to missing key compliance deadlines.  Though as you will read below, the thermal power industry has its own reasons to be unhappy.

FUEL PRICE BREAKUP

Petrol Price Diesel Price Calculation
International Price of Crude Oil including Freight 79.93 $ or Rs 5700 per Barrel 79.93 $ or Rs 5700 per Barrel
1 Barrel of Crude Oil 159 Litre 159 Litre
Crude Oil  – Cost per Litre Rs 35.89 per Litre Rs 35.89 per Litre
Basic OMC Cost Calculation *
Entry Tax, Refinery Processing, OMC Margin, Freight Cost Rs 3.45 per Litre Rs 7.14 per Litre
Basic Cost of Fuel after Refining Cost Rs 39.34 per Litre Rs 43.03 per Litre
Additional: Excise Duty + Road Cess as Charged by Central Government Rs 19.48 / Litre on Petrol Rs 15.33 / Lit on Diesel
Pricing Charged to Dealers before VAT Rs 58.82 per Litre Rs 58.36 per Litre
Calculating Dealer Retail Price – Base Location Delhi
Commission to Petrol Pump Dealers Rs 3.63 per Litre Rs 2.53 per Litre
Fuel Cost Before VAT (rounded off for approximation) Rs 62.45 per Litre Rs 60.89 per Litre
 
Additional:VAT (Varies from State to State – 27% on Petrol & 16.75% on Diesel + 25p as Pollution Cess with Surcharge) Rs 16.86 / Lit on Petrol Rs 10.45 / Litre on Diesel
Final Retail Price as on 4th September 2018 Rs 79.31 per Litre Rs 71.34 per Litre

As one can see from the chart above, in some states, actual price paid is over twice the landed cost of fuel. But here is the problem. The government, including the states are practically addicted to fuel taxes. Excise collections from petro goods have more than doubled in the  last four years – from Rs 99,184 crore in 2014-15 to Rs 2,29,019 crore in 2017-18. States saw their VAT revenue from petro goods rise from Rs 1,37,157 crore in 2014-15 to Rs 1,84,091 crore in 2017-18. States like Madhya Pradesh, Orissa have almost 20% of tax collections coming from fuel taxes.

This dependence on what is effectively a ‘sin good’ if we go by the taxes being imposed, is truly deplorable, as it leads to a moral hazard of authorities being reluctant to  take serious action against their consumption.  the same story is repeated with the coal cess, where the compensatory cess after GST came in is at a much higher Rs 400 per tonne. In fact, if you consider total taxes on thermal generation, almost 10% of discoms total cost is taxes paid to the government. Not exactly the best way to make power for all affordable, a problem plaguing the industry today, with idle generation capacity.

What is needed is a more rational energy policy, that considers urgent steps like rationalisation of taxes, investment in bus transportation infrastructure and some level of gamification where states are rewarded for moving faster on public transport.  Large consumers like the railways and the armed forces can always wring out better efficiencies, if a serious effort is made. India, which consumes close to 4.5 million barrels per day, can make a serious psychological and real impact on global prices by declaring a serious plan, and intent to reduce consumption, voluntarily.

 

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