Rationalise Tax Structure To Stabilise Spiralling Fuel Prices.

In recent times, volatility in petrol prices has significantly increased and there have been as many as six upward revisions of the prices over last eight months. This has put immense pressure on the economy and the common man, as motor fuel prices in India are already among the highest worldwide. This trend can be attributed to steadily rising crude oil prices and the deregulation of petrol prices, linking them to global crude oil prices. Deregulation of the diesel prices is now under consideration of the government.

It was felt that deregulating motor fuel prices would ensure smooth functioning of the oil companies, which play a crucial role in the country's economy and overall energy security. However, partial deregulation has not addressed these concerns, as evident from the fact that the oil marketing companies (OMCs) are still running under-recoveries of 150 crore per day on the sale of motor fuel.

A faster-than-expected global economic recovery together with the recent political crises in west Asia and north Africa has pushed crude prices to over $100 a barrel. This may lead to relapse of the 2008 situation when crude prices touched a historic high of $140 a barrel, resulting in massive under-recoveries for the oil companies.

While the crude oil prices cannot be controlled, it is time the government revamped the existing tax regime on motor fuel. More so as taxes constitutemore than half of the retail pricesof motor fuel. In a scenario where motor fuel prices are deregulated, the taxation policy needs to be flexible andlinked to the global crude oil prices to ensure prices can be held stable and the pressures exerted on the economy during increasing price trends can be absorbed.

Today, import of crude oil is charged basic Customs duty (BCD) at an ad valorem rate 5% and is a non-creditable tax, and that adds to the cost of production. One way to ensure that BCD does not contribute to the ever-increasing retail prices is to replace it with a specific duty component, which may be periodically revised to reflect global price trends. Levying BCD at specific rates, with a provision to revise it periodically, would ensure that the oil companies are protected from global crude price fluctuations.

In recent years, excise duty on petrol and diesel was changed from ad valorem to specific rates for these very reasons. However, the excise duty structure on motor fuel also needs to be revised. Currently, excise duty on petrol is 14.35 a litre, and on diesel 4.60 a litre.

This includes 2 a litre levied as additional duty, introduced in 1998 with the stated objective of utilising such funds for developing the country's roads and highways infrastructure. Given that this levy has been around for more than a decade and there are alternate sources available to fund such projects, it would be logical for the government to remove this levy. Also, excise duty rates need to be reduced in view of the increasing pricing trends.

Further, the states too levy value added tax (VAT) on motor fuel at rates ranging between 20% and 25%, often lifting them arbitrarily to augment revenues. Since VAT on motor fuel contributes significantly to states' revenues, they are unwilling to reduce the tax rates. Accordingly, the government may consider devising a mechanism of cash compensation to the states for this purpose, and give special status to motor fuel to establish parity in VAT rates across states.

That apart, states also levy various non-creditable local taxes and cesses such as entry tax, octroi, municipal levies, etc, that need to be scrapped.

India is now on the threshold of moving towards a unified goods and service tax (GST) regime. However, the policy documents issued by the government so far indicate that motor fuel would remain outside the purview of GST. Since the very concept of GST is to ensure a seamless flow of tax credits at every stage of the value chain to increase efficiency and reduce the overall cost of production, keeping motor fuel outside the purview of GST could be counterproductive.

It was expected that some steps would be taken by the government to address the above issues in Budget 2011 proposals. However, that has not been done and now it appears that we may have mid-term revisions in the tax structure if the crude oil prices continue to move northwards.

It is imperative to change the traditional mindset that treated petrol and diesel as luxury goods. In the modern economy, motor fuel is a crucial part of everyday life for individuals and businesses, and the taxation policies must reflect this reality.

Source : economictimes.indiatimes.com