Time for reform of indirect tax on oil.

The reported likely shortfall in tax collections is the right trigger for some holistic duty rationalisation in the oil sector. The import duty on crude and refined products should be aligned at exactly the same level, the excise duty on all refined products should be unified and oil products have to be brought under the goods and services tax to prevent cascading of taxes — tax being levied on price inclusive of tax levied at a previous stage — and keep the tax credit chain unbroken. Further, marketing of refined products should be opened up so that the cosy public sector oligopoly is broken and competition eliminates padded costs and margins from the pricing.

In India, there is wide currency for the notion that the import duty on a value added product should be higher than that on its inputs. The notion is ill-founded, for all its long reign in India's tax policy. What really counts is the effective rate of protection, which measures the protection accorded to a good taking into account the tariffs on itself and its inputs, besides the value added in its production. And the way it works out is that a duty differential between input and finished goods yields a very high rate of effective protection.

When the import duty is pegged at the same rate for inputs and the finished good, the effective protection is also at the self-same rate. In the case of crude and products, the present practice of keeping import duty on crude at zero, while it is 2.5% on diesel and petrol and 5% on other products, gives refineries huge effective protection.

It also robs the exchequer of legitimate revenue. A sensible reform is to introduce a positive but low import duty on crude and lower the import duty on products to that level. This will bring in welcome revenue, lower the hurdle for independent marketers who wish to import petrol and diesel but have to pay duty on these and compete with refineries that get their crude duty-free.

Diesel prices would go up a little, but not wildly as padded costs would go and competition would check prices. Petrol prices would come down sharply. And so would the fiscal deficit, without savaging Plan spending.

Source : economictimes.indiatimes.com