.Innovate to save oil marketing companies
Notify diesel as ‘declared goods’, reduce Excise Duty

New Delhi, May 9 : With the Indian basket of crude oil at 68.9$ per barrel in the second fortnight of April 2006 and prices going north the net realization to oil companies for petrol (MS) and Diesel (HSD) does not even meet the processed cost of product per barrel of crude oil.  If the Rangarajan Committee report is implemented it translates into an increase of Rs.8.84 per ltr. in the price of petrol and 8.89 per ltr. in the price of diesel at Delhi.  The current retail selling price for petrol at Delhi is Rs.43.49 per ltr. and for Diesel is Rs.30.45 per ltr.

Since the common man may not be able to suffer such a hefty increase in one go it may not be possible for the Government to provide succour to the oil companies and save them from sickness.  Innovative ways have to be found for ‘equitable sharing’ of the burden of the increasing oil prices.  A few specific suggestions are made hereunder to soften the sufferings of the oil companies and the consumers, in the event of a pass through of high crude oil prices.

The Excise Duty on petrol and diesel needs to be lowered sharply. Currently petrol attracts a Basic Excise Duty (BED) of 8% (ad valorem) plus Rs 5 per litre; an Additional Excise Duty (AED) of Rs 2 per litre; and a Special Additional Excise Duty (SAED) of Rs 6 per litre.  Diesel also attracts a BED of 8% (ad valorem) plus Rs 1.25 per litre and an AED of Rs 2 per litre.  These work out Excise Duties of Rs 15 per litre on petrol and Rs. 5.10 per litre on diesel, inclusive of 2% education cess.

The SAED on petrol of Rs 6 per litre was levied by Government in March 2002 just before dismantling of APM while doing away with the oil Oil Pool Account and the cross-subsidy elements since these were provided for in pricing and margins.  Removal of this provision of SAED can make a substantial difference in petrol pricing.

Another argument given has been that the higher rates of Excise Duty are to make up for the reduction in Customs Duty on crude oil from 10% to 5%.  The continually rising crude oil prices have resulted in the Government garnering more revenue than it did when the Customs Duty was at the level of 10%.

As per figures given by the Rangarajan Committee, Customs Duty from petroleum was 16% of the total collection in 2001-02. It went up to 24% in 2004-05 and has gone up further during 2005-06.  Similarly the share of petroleum in Excise Duty collections was 39% in 2001-02 and went up to 43% in 2004-05 and even higher in 2005-06.

Secondly, the rate of Sales Tax in the country is a weighted average of 26.7% for Petrol and 21% for Diesel.  It in fact varies from 20% to 34% in various States in the case of Petrol and from 8.8% to 31% in the case of Diesel.  There is a strong case for rationalisation as recommended by the Rangarajan Committee as well as the Empowered Committee of State Finance Ministers on VAT. The mere reduction of Sales Tax to a uniform 12.5% or 12% would substantially reduce by over 30% the burden of increase in retail selling price of Diesel for the consumer. So would it be in the case of petrol.

 To promote the concept of ‘equitable sharing of burden’, the Union Budget 2006 had notified LPG for domestic use as ‘declared goods’ and hence chargeable to VAT at a maximum of 4%.  This has been a welcome step.  A similar innovative solution to the oil price imbroglio would be the notification of HSD as ‘declared goods’ since it impinges significantly on the national economy.  Diesel is a prime mover for the national economy.  It is used extensively for agriculture,  transportation of agricultural produce and mass transportation. A hefty increase in diesel selling price can trigger inflationary tendencies.  This single step, resulting in a uniform Sales Tax across the country of 4% on Diesel, can result in more than 60% reduction in the necessitated increase in Diesel prices.

What is needed is the will and affirmative action by the Government to take a decision which it has been procrastinating for long.

It may be borne in mind that the price of the Indian basket of crude has gone up from 23.31 $ per barrel in March 2002 to 68.90 $ per barrel in the second fortnight of April 2006, an increase of 195.6%.  Similarly there has been an increase of 203% in the price of petrol and 280% in the price of Diesel.  On the other hand the prices of petrol and diesel have been raised in the country only by 63.8% and 83.5% respectively.  The price of LPG, in $ per tonne, has in the same period gone up by 176% whereas the increase in retail selling price of domestic LPG has been only to the extent of 13.6%. The price of a domestic cylinder needs to be increased by nearly Rs 120 from the existing Rs 294.75 at Delhi. The Rangarajan Committee recognized in February 2006 the need for an immediate interim increase of Rs 75 per cylinder.

PetroFed in December 2004 had submitted a report to the MoP&NG on subsidy administration of domestic LPG.  The report, prepared by IIM-A, had subsequently also been submitted to the Ministry of Finance.  The thrust of the report was that subsidies should be eliminated and if not in one go be limited to BPL families.  The administration of the scheme should be through smart cards. The Rangarajan Committee advocated the same. 

The case of kerosene, which is projected  as a common man’s fuel, is no less different.  The NCAER report conservatively estimates the diversion of Kerosene (PDS) at about 36%.  This is not taking into account the loss of revenue to the Government on sale of diesel which it supplants.  The system of providing subsidised kerosene only to BPL families through implementation by smart cards should be used in this case also.

Pricing of key petroleum products like petrol, diesel, domestic LPG & kerosene(PDS) needs innovative thinking for the healthy growth of oil marketing companies in the context of unabated rise in crude oil prices.

Y Sahai
Director (Communication & Marketing)
Petroleum Federation of India
1st Floor, IndianOil Bhavan,
Sri Aurobindo Marg, Yusuf Sarai,
New Delhi – 110 016
Tel. : 011-26537069
Fax. : 011-26964840
e-mail : petrofed@petrofed.org
website : www.petrofed.org