NEW DELHI: The oil ministry has asked for a tax cut of Rs 6 per litre on petrol to help avoid a sharp rise in retail price of the fuel, but the finance ministry, which has already surrendered Rs 49,000 crore by reducing various levies of fuels last year, is reluctant to forgo more revenue.
The oil ministry’s request follows demands by state-run oil marketing companies to either cut taxes or allow them raise petrol prices by Rs 8 per litre.
“The petroleum ministry wants the special additional excise duty ( Rs 6/litre on petrol) to be removed so that price increase can be kept as low as possible,” a government official told ET. Total central levies on petrol are Rs 14.78 a litre, including education cess.
The finance ministry is reluctant to cut duties that would reduce its revenues and jeopardize its fiscal consolidation plans. The finance ministry had already sacrificed Rs 49,000 crore revenue through duties cuts on petroleum products in 2011-12, officials said.
Economists say that shielding consumer from market realities only encourages irrational consumption. “Consumption should not be incentivised. A comprehensive policy needs to be put in place to ensure transmission of global prices to consumers,” said D K Joshi, chief economist, Crisil.
Unable to raise petrol prices due to pressure from the oil ministry Indian Oil, Bharat Petroluem and Hindustan Petroleum have demanded that either the government should reduce duties or formally control petrol price again.
“The company is awaiting for government’s response to its requests and should no relief come forward, it will have no option but to effect the aforesaid increase in MS (petrol) prices,” IOC said in a statement issued last week. The company said it would raise petrol prices by Rs 8.04 a litre exclusive of local levies.
The cabinet has granted state oil firms the freedom to raise or cut petrol prices but the oil ministry, which controls these companies, has informally enforced a price freeze since Dec 1 despite the steep rise in crude oil costs. Since the fuel has been technically dectontrolled, oil firms are not entitled to any compensation from the government for below-market sales.
Indian Oil Corp, India’s biggest fuel retailer by volume, had said last week that the companies could not meet country’s fuel demand if they continue to sell petrol below market rates.
“Continuation of such pricing will only impede the ability of the company to import crude oil and may affect product supply-demand balance; or else the company increase the price of petrol by Rs 8.04 per litre (excluding state levies) with immediate effect,” IOC said. If the price were raised, with taxes, petrol would become costlier by 9.65 a litre in New Delhi.
IOC, BPCL and HPCL last exercised their pricing freedom on December 1 when they reduced it Rs 0.65 paise. But the oil ministry, which has tacit control over pricing of petrol, did not allow companies to raise prices when international crude prices soared to avoid its political fallouts.
State oil companies are incurring about Rs 49 crore revenue loss on petrol every day due to surging high oil prices, which averaged at $119 a barrel in April. The government needs to revise fuel prices in line with cost of imported fuel to depress demand, which is a major reason for the high current account deficit that is pegged at excess of 3.6% of GDP, an economist said.
State oil retailers have requested the government to “declare petrol a regulated product temporarily and provide 100% cash compensation to OMCs, or reduce the excise duty on petrol from Rs 14.78/lt by an amount equivalent to the under-recoveries on petrol and simultaneously advise the states to reduce the rates of sales tax, which vary from 15% to 33%. States taxes are ranging between Rs 10.30 per litre and to Rs 18.74 per litre on petrol.