Rising fuel prices: Why India is paying the price for its irrational energy tax policy

Anshuman Tiwari
Anshuman TiwariOct 18, 2018 | 13:52

Rising fuel prices: Why India is paying the price for its irrational energy tax policy

The government's headline-grabbing benevolence of up to Rs 2.50 per litre cut in petrol and diesel prices couldn't sustain even for two weeks as diesel prices hit another lifetime high on October 16. The boiling crude and plummeting rupee has sucked all the benefits of compassionate tax cut on fuels, offered on October 4, leaving the government with a revenue hole of Rs 13,000 crore during the remaining part of the current financial year.


What is more worrying is the fact that the government and oil companies are seemingly clueless about the next course of action on petroleum prices while fiscal siren beckons over the Centre's budget amid a sustained surge in crude oil prices and the tumbling rupee.

As Shakespeare's Cassius (Julius Caesar) said — the fault, dear Brutus is not in our stars, but in ourselves that we are underlings — India is, in fact, paying the price for its own exploitative and irrational energy tax policy. Volatile global energy market has less to do with it.

India is, in fact, paying a price for its own exploitative and irrational energy tax policy. (Credit: Reuters)

It was just not a coincidence that right in the middle of blazing petro prices, a couple of state governments announced free distribution of mobile phones and free power in order to win votes in the coming elections. No surprises that other states would replicate the same in the form of other freebies.

India's extremely profligate ‘maximum’ government has been squeezing the entire energy sector — power, petrol-diesel and gas — through irrational tax policy to finance their bloating budgets to fund populism. Barring the poll season, the governments (Centre and states) never lose any opportunity to squeeze petroleum products by imposing various taxes , which makes India an economy with highest energy costs.


India's energy tax policy is turning lethal with the rise in global crude oil prices and the fall of the rupee. The Modi government has further aggravated energy tax policy by continuously increasing excise duty on petroleum products during the heydays of cheap crude.

In spite of GST, spendthrift and revenue innovation-challenged governments (Centre/state) have deliberately levied multiple direct and indirect taxes on the transport, fuel and petroleum sector in order to finance reckless spending.

Taxes on the hydrocarbon sector include road development cess on diesel, import duty and GST on petroleum machinery, corporate tax on oil companies, tax on dividend accruing from them to government and royalty to states on oil mining apart from exorbitant excise and VAT (Rs 25 to Rs 38 per litre) on petrol-diesel. This massive taxation finally reflects in the consumer price of petroleum products and makes India an economy of pricey energy.

In India, the government treasuries run virtually on revenues on petroleum products. Just before the launch of GST, as much as half of the excise (tax on production) revenue of the central government came from petroleum products. Still petroleum products hold a share of 40 per cent in the entire indirect tax collection of central government. While in states, VAT on petro products contributes nearly 50 per cent to the entire revenues of the respective states.


Almost half of government's indirect tax earning comes from a bunch of petroleum products. (Credit: PTI Photo)

It is fiscally bizarre that production and sale of the entire gamut of products account for merely half of the governments’ indirect tax revenue while almost half of their indirect tax earning comes from a bunch of petroleum products, which have a direct relationship with inflation and cost of doing business.

With government's overdependence on petroleum revenues, oil PSUs have virtually turned the single most important source of revenue for government treasuries. With its total control on oil and gas market, five government petroleum companies (ONGC, IOC, HPCL, BPCL, GAIL) are now among the 20 top companies that yield the maximum corporate tax. Oil companies collect almost 40 per cent of total indirect tax for the central government and also pay a huge dividend (Rs 17,000 crore in 2017) to the government every year.

As government revenues appear fragile owing to recent excise duty cut on oil and sliding GST collections, the finance ministry has forced oil marketing PSUs to not cut dividends despite oil retailers absorbing Re 1 per litre from last week.

The fiscally challenged government has also ordered oil PSUs to buy back their shares worth Rs 10,000 crore to meet budget divestment target.

In 2017, the government had forced oil companies to cough up a special dividend of Rs 4,570 crore to meet its fiscal deficit target for the year.

In 2004, India started its journey towards Goods and Services Tax with a dual aim of reducing taxes and government expenditure in tandem. Governments were expected to control deficits and augment revenue through high consumption driven by lower taxation.

From conceptualising GST to its implementation, Central and state governments have never made any serious move to bring energy and fuel under GST as they prefer to tax this arbitrarily in order to fund their populism.

It is highly unlikely that petrol-diesel and electricity are going to be included in GST anytime soon as governments cannot afford to cut taxes and offer input tax credit on energy under the GST.

Irrespective of the upheavals in the global market, if the government fails to curb their wasteful expenditure, we are destined to live with pricey fuel and high inflation.


Last updated: October 18, 2018 | 14:32
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