India imports a major part (around 70%) of its crude oil requirement. The import bill was around Rs 4,70,000 crore for the Financial year 2016-17. The average price of Indian basket of crude in 2015-16 was $ 46.17/barrel, the lowest since 2004-05. (1 barrel of crude = 159 liters )
Decline in crude oil prices helps the government manage its finances better as it translates into lower subsidies on petroleum products (LPG and kerosene), thereby resulting in lower fiscal deficit.
(What is Fiscal Deficit? – The difference between total revenue and total expenditure of the government is termed as Fiscal Deficit.)
(Source : www.ppac.org.in)
So, when the international crude oil prices have been declining, why are the diesel and petrol prices still high in India?
As of now, Petrol and Diesel have not been brought under GST, if they are covered under GST, what would be the impact? Will it lead to reduction of petrol prices and benefit the common man? Why is the Govt dilly-dallying on the decision of including petrol under GST? ..Let’s discuss..
How are diesel and petrol prices calculated?
Do you know that ‘taxes & margins on petrol prices exceed the actual cost price’ in India. Yes, this is true!
The Taxes on petrol and diesel, in the form of Excise Duty (levied by the Central govt) and VAT (by States) account for almost 40 to 50% of the total cost price of petroleum products in India.
So, the central govt and State Govts gets lot of revenue through Excise Duty and VAT/State Sales Tax respectively. So, any reduction in the rate of taxes and duties, will have an impact on the revenue collections of the Govt.
Even after recent excise and VAT cuts, prices for petrol and diesel at Rs 70s per litre and around Rs 58 per litre, stand close to their three-year highs. Over these last three years global crude prices have halved from around USD 110 per barrel to USD 56 per barrel. This effectively means that we (Indian consumers) are paying almost the same for petrol and diesel when crude was at USD 110/barrel.
In case, the Govt brings in petrol and diesel under the purview of GST , what would be the impact on their prices?
As of now, there are four slabs under GST i.e., 5%, 12%, 18% and 28%. Even if we assume Govt to put petrol in the highest bracket of 28%, due to fear of exchequer loss and Diesel in say 18, we can expect lower prices on Diesel and petrol. Let’s now try to calculate the petrol prices under these assumptions.
Petrol under GST? – Benefits & Challenges
Inflation : The price of oil and inflation are often seen as being connected in a cause and effect relationship. As fuel prices move up or down, inflation follows in the same direction. Inclusion of petrol and diesel under GST can lead to lower fuel prices, which in-turn can pull down inflation rate. This can have a direct impact on gross house-hold savings and people can have higher investible surplus.
(Related article : ‘5 Important Macro Economic Indicators you need to track as an Investor!‘)
Lower Tax collections :
- In case, the petroleum products are included in GST bracket, there will be huge changes in central and state govts’ tax revenue collections.
- A mere Rs 2 reduction in excise duty recently amounts to around Rs 26,000 crore reduced collections annually (around 10 percent of total collections from fuels). The State govts will also incur loss of revenues if VAT is abolished.
- So, the state Govts may not accept the proposal of including petrol and diesel under GST (or) they would like to get adequately compensated for the lost revenues from the central govt.
If Govt implements GST for Petrol and diesel, and also compensates the States to certain extent then it will have to take a huge hit on its revenues which could impact infrastructure spending / economic growth. The Govt has to find an alternative source of revenue, until then, I believe that it will continue to play ‘heads I win, tails you lose’ with the consumer.
We also need to watch out for the international oil prices. They have recovered more than 65% from their recent low levels in January (2017). However, they are still 60% below their 2014 peak. Going forward, potential supply discipline by OPEC countries and global demand scenario will be the crucial factors that would drive movement of oil prices.
I believe that ‘renewable sources of energy’ is the future. The entire world has to aim for a greener tomorrow. We should not depend much on petroleum products. The Govt has to aggressively push for wind and solar power generation projects.
Continue reading :
- What is GST? What are its benefits? | Detailed explanation in simple terms
- How to spot Fake GST Bills?
- How anyone can prepare GST Returns using Tally ERP.9?
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net) (References : moneycontrol, IOC & ppac.org.in) (Post published on 05-December-2017)