Competition not tax cuts for fuels

Competition not tax cuts for fuels

The government is spot on in deciding to pass on higher costs of crude oil imports by duly raising retail prices of petroleum products back-to-back. The fact is that taxes, duties and cess on petroleum are extremely significant, accounting for about 40% of governmental revenue. And lowering the taxes and duties, in an attempt to somewhat moderate price of petro-products, would disturb the fiscal and macroeconomic balance.

If lower petroleum taxes force the government to borrow excessively from the market, it could crowd out private investment and stymie overall growth. Note that consumption demand for the main petro-goods like diesel and petrol have been rising by leaps and bounds of late, growing by double-digits in July, for instance, regardless of steady price increase. And any attempt to artificially repress retail oil prices, to curry favour with the electorate, will likely accelerate oil demand. We are hugely and overwhelmingly dependent on crude imports, and India is already the third-largest oil importer.

However, while passing on higher imported costs makes perfect sense, we do need to reform the oil economy. The way forward is to open-up oil marketing to the larger retail industry, as is par for the course in the mature markets. We do need to do away with ring-fencing, in effect, retail sales of oil products only for oil companies. Abroad, independent retailers account for some half the retail oil offtake. We also need to reform and modernise oil taxes, so as to put paid to the high-cost and cascading tax-on-tax regime at each stage of output for the main petro-goods, and bring all petroleum products under GST, albeit with limited tax-setoffs for oil items, as is the global norm. We must widen the indirect tax base and not rely so much on oil revenues.