Context: Recently OPEC+ agreed to extend the ongoing oil production cuts into 2024 as it seeks to keep oil prices from falling in the wake of concerns about a global economic slowdown. For India, which imports more than 80% of its crude oil requirements, the combined OPEC+ announcements of supply curtailment are a cause for some concern given the potential they have in pushing up global oil prices.
Though the crude oil prices softened towards the end of FY22-23, Pump prices of petrol and diesel have remained unchanged since May 22, 2022, with the governments at the Centre and the States, and the oil marketing companies unwilling to reduce the taxes and revenues in order to insulate themselves from any rise in the cost in future.
Breakup of Prices of Petrol & Diesel:
Public sector Oil Marketing Companies (OMCs) revise the retail prices of petrol and diesel in India on a daily basis, according to changes in the price of global crude oil. The retail price charged to consumer includes the following components:
Base price set by OMCs
Several parameters like global crude prices, expected future crude prices, local taxes, Shipping costs, apart from the cost of refining are considered while fixing the rates which may be different for different OMC.
- Freight price includes the cost of transporting to dealers across India.
- Dealer commissions
- Taxes and Surcharges of centre includes
- Basic Excise Duty
- Agriculture Infrastructure and development cess
- Road & Infrastructure cess
- Taxes of State governments includes Sales tax/ VAT
The prices of Petrol & Diesel vary from city to city depending upon the taxes charged by the state governments. Usually, the share of tax component in the retail price is above 40%. SO any reluctance by the centre or state governments to decrease their taxes will not result in transmission of softening of global crude oil prices to the ultimate consumer.
Petrol & Diesel under GST?
There has been growing demand to include petrol products under GST mechanism as it may reduce the ultimate price paid by the consumer because:
- Even if petroleum is charged at the current maximum tax slab of 28%, consumers will be paying a lesser price than they are presently paying for it.
- GST, being a value added tax mechanism, ensures that there is no cascading effect (tax on taxation).
However, most of the states are unwilling to this proposal as states generate a considerable amount of revenue from taxing petroleum products. Each state has its own taxation structure for petrol and diesel. Under GST, even under the 28 per cent tax slab, states will earn a lot less compared to what they currently earn from petrol and diesel sales as value-added tax (VAT). Few States are demanding that if petrol and diesel are brought under the GST, then the Central Government must compensate all the States of their deficit revenue. However, there has been no such commitment given by the centre.
Will inclusion of Petroleum under GST solve the problem?
In the short run, lowering the prices of petrol and diesel due to GST may prove helpful but ultimately, all the consumers will have to start shifting towards renewable energy sources for sustainable growth and development and insulate Indian economy from any geo-political shocks.