Monday, June 12, 2006

Fuel price: Govt, states gain more than oil firms

This is a copy paste of a news item from TOI, Delhi, 12th june 2006. It is not my article but the red colouring is. It is probably because of wrong policies of this country which is why we are all suffering- the oil companies and the citizens. I have nothing more to say.


Are petrol and diesel priced lower in India than in the international market? Not if we are looking at retail selling prices. For instance, the price of petrol in the US is about $2.90 per gallon today, which is equivalent to about Rs 34.50 per litre, way below the retail price for petrol anywhere in India. Diesel too costs about the same amount in the US, which is quite similar to the price of diesel in India.

Then why does the government complain of oil companies making losses on these products? The price we pay for petrol or diesel is not the price the oil companies get for them. In fact, less than half of what we pay for petrol actually goes to the oil companies. Calculation done by the petroleum ministry before the latest increase in prices, the oil companies net realisation on a litre of petrol sold at Rs 47 was merely Rs 20, while on a litre of diesel sold at Rs 33.4 their realisation was Rs 20.9. The estimated cost of crude alone to produce a litre of petrol or diesel without adding any levies would be about Rs 23. Hence the situation of oil companies having to suffer losses even on petrol and diesel.

Where does the rest of the money go? The bulk of the remaining part of the price of petrol goes to the central and state governments in the form of various levies. In the case of petrol, for instance, the calculations showed that the Centre imposed various kinds of excise duties that totalled up to about Rs 15 per litre. The states, in turn, imposed sales tax that worked out to an average of just under Rs 10 per litre. Other costs like dealer commissions, freight and marketing costs between themselves accounted for barely Rs 2.20 per litre. In the case of diesel, which is taxed relatively modestly by both the Centre and states, the total amount of levies per litre was about Rs 11 per litre.

If so much of the price is in the form of taxes, why can’t they be cut? This argument has been made by many. The argument is that since tax rates include an ad valorem component — that is a component fixed as a percentage of the pre-tax price — the Centre and states gain windfall revenues when prices go up. Hence, it should be possible for them to moderate the price increase by forgoing some of this supernormal revenues. In fact, even the Rangarajan Committee — which was set up to examine the entire gamut of issues relating to petroleum product pricing in India — had suggested that the government fix specific duties — that is, duties spelt out in rupees per litre — so that the tax component of the retail price does not go up as prices do. The same Committee had also recommended that state governments agree on a uniform rate of sales tax. At the moment, the rates vary widely across states, which explains to a large extent why retail prices are so different in different parts of the country. On petrol, for instance, the sales tax rate varies from 20% to 34% and on diesel from 12% to almost 29%. The latest decision by Maharashtra to forgo additional tax revenues on the increased price is a small step in the direction and there are indications that other states, particularly Congress-ruled states, might follow suit.


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