Has Government run out of options?

| | in Oped

GST Council — the all powerful body that considers changes in the tax structure/rate — should consider inclusion of oil and gas products in the GST, putting them under the 18 per cent slab with the aim of eventually shifting them to the 12 per cent slab

Some time back, three public sector undertakings (PSU) in the downstream oil segment viz Indian Oil Corporation (IOCL), Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum Corporation Limited (BPCL) were reportedly directed not to hike the price of petrol and diesel by one rupee a litre each that had become necessary due to an increase in the international price of these products.    

The prices of these products were decontrolled (petrol in June 2010 and diesel in November 2014), and since then, the oil PSUs set their prices on the basis of a movement in their international price (using import parity price and export parity price in 90:10 ratio). Whereas, up to June 14, 2017, these were revised fortnightly. From June 15, 2017, the revisions were done on a daily basis. Though Union Petroleum Minister Dharmendra Pradhan had denied the report, the very fact that for over two weeks since, the prices have remained unchanged — despite the requirement of revision on a daily basis — shows that IOCL/BPCL/HPCL have received necessary directions in this regard.   

What has prompted the Government to intervene? Does it not set a bad precedent for the future? How will the PSUs be impacted? What is the way forward? India depends on import for meeting 83 per cent of its oil requirements. For 30 months at a stretch, beginning mid 2014, due to a steep decline in the international price of crude oil (from a peak of  $117 per barrel in June 2014, it had plummeted to a low of  $27 per barrel in January 2016) and corresponding reduction in the price of petrol and diesel, it was a honeymoon period for all three major stakeholders viz Government, consumers and oil PSUs.

While consumers gained due to a reduction in price by 25 to 30 per cent, the Centre increased its revenue by hiking excise duty (ED).

Between November 2014 and January 2016, ED on petrol went up from Rs 9.48 per litre to Rs 21.48 per litre or 2.26 times, whereas on diesel, the increase was even sharper from Rs 3.56 per litre to Rs 17.33 a litre — almost five times (though in October 2017, these were reduced by two rupee per liter each, the extant levels remain high). As a result, the Union Government’s collection from ED more than doubled from Rs 99,000 crore in 2014-15 to Rs 242,000 crore in 2016-17. 

The oil PSUs too added to their profitability. The post-tax profits of IOCL/BPCL/HPCL trebled from about Rs 11,200 crore during 2014-15 to Rs 37,600 crore during 2016-17. This was primarily due to an increase in refinery margin resulting from lower cost of processing crude even as the fall in price of refined products viz petrol and diesel was not proportionate. 

After January 2016, the crude moved up gradually to $40 per barrel by December 2016. Since 2017, the price continued its upward march and is currently touching $75 per barrel mark. Even though it is still significantly below the mid-2014 level, the price of petrol and diesel has escalated to over Rs 74 per litre and Rs 65 per litre respectively (in Delhi) breaching the mid-2014 level. 

The overriding reason for the misalignment between the price of crude on the one hand and prices of petrol and diesel on the other is the high level of ED besides VAT, which is levied at a high of 27/17 per cent in some States. The hike in ED did not prick when the crude price was low. Now, when the latter has increased, the former is hitting the consumer hard. In view of impending elections in a couple of States during this year followed by the general election in 2019, the ruling dispensation is, therefore, keen to avoid further hike in prices. 

At the same time, it does not want to risk reduction in revenue collection, which the logical course of reducing ED would lead to (every rupee cut in ED means a revenue loss of about Rs 13,000 crore annually), thereby, upsetting its fiscal arithmetic. Economic Affairs Secretary S Garg has categorically ruled it out. 

But to expect oil PSUs to absorb the impact won’t be a prudent idea. Such an action, apart from being viewed as a breach of good corporate governance and erode investor confidence (public in particular, foreign investors are funneling money in them on the basis of ‘transparency’ and ‘predictability’ of their pricing decisions which will be marred if they are told to deviate from set guidelines), has the potential of wiping out their profit. In turn, this will undermine their ability to implement expansion and modernisation projects when the country needs more throughput to meet the growing demand.

Clearly, it is a payback time for the Government. The only way to shield the consumers from rising international price of crude is to reduce ED and ask the States to also affect a reduction in VAT. At the same time, it should implement all necessary steps to tap the full potential of GST for increasing tax collection. At present, crude, petrol, diesel, natural gas and aviation turbine fuel are not included under the GST dispensation as the States fear a loss of revenue due to their inclusion. The fear is unfounded as under it, there will be buoyancy in collection even if the tax rate is kept low. This is primarily due to: (i) Hitherto unaccounted transactions coming under the tax net and (ii) boost to GDP due to elimination of cascading effect of tax-on-tax and reduction in logistics cost.

The GST Council — the all powerful body to consider changes in the tax structure, revision in tax rate, inclusion/exclusion etc — should, therefore, consider inclusion of all oil and gas products under GST putting them under the 18 per cent slab initially with the aim of eventually shifting them to 12 per cent slab. Though the Petroleum Minister hinted at inclusion on more than one occasion, the Finance Minister should crack the whip by taking the States on board. Considering that majority of the States are ruled by the BJP, the task may not be as daunting as it is made out to be.                 

(The writer is a freelance journalist)

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