Print Email Download

Subsidy for Petroleum products in India

The subsidy as concept was initially established as part of distribution scheme during fuel shortages in World War II. After the was, the subsidy was maintained with the noble intention of sufficient availability and access of cooking and lighting fuel to common household and with the intention of stabilizing prices.

The system of subsidy provided by Government for Kerosene oil and liquefied petroleum gas (LPG) is challenging issue and of great concern not only for Oil Marketing Companies (OMC) but also for the common consumer who lives down the streets of India due to higher price fluctuations in the crude oil. In the last 2 years the crude oil has been seen fluctuating from 45$ per barrel to 150 $ per bbl and rejoining levels of >90$ per bbl in December 2010.

Defining Subsidy

IMF defines subsidy as

A price subsidy is the difference between the price facing producers or consumers and a specified “Optimal” benchmark price.

In an economy which can bear the characteristics of “Competitive Markets” ,wherein the resources can be transferred by negligible amount using various taxes, the marginal supply cost of he product is taken as the “Bench mark Price”. Practically, consumption taxes are required to be applied on the products to raise revenue or correct any market failures ( which can happen in economy either due to asymmetry of information or other reasons) and therefore Benchmark prices should also include “Operational optimal Taxes” in addition to the marginal supply costs.

A tax component below its “Operational optimal level” generates a “Tax Subsidy”

Global Perspective for Oil Subsidy & Ramsey rule for Subsidy

Various Countries have different tax levels due to various operational reasons which may include tax collection as revenue generators, revenue requirements ,array of tax instruments available to the government, concern about distribution of income patterns across length and breadth of country.

Fundamentally the basic economic priniciple indicates that the tax component on petroleum products should be higher as compared to the taxes on other consumer goods in view of revenue and environmental concerns.(Crawford,Keen & Smith,2008)

Revenue Perspective : As per Ramsay rule for efficient commodity taxation, the tax levels across various goods /commodities should be inversely proportional to the Price elasticity of demand inorder to minimize the disturbances in distribution. Since the demand is ineslatic the tax component can be higher for the petroleum products.

Environment related aspects : Apart from the revenue issues as described above, the environmental aspects consider the externalities involved by consumption of the products such as pollution and Global warming. In case the taxes are high that proves to be a deterring factor and promotes rationalized usage of the petroleum products.

It has been noted that Universal subsidies are not the right solution for protecting the common masses in any country.

These factors change with the passage of time and differs from country to country based on their PESTEL macro economic environment.

In India – Scenario

Indian Government provide subsidy for Kerosene ( distributed through Public Distribution System(PDS)) and for LPG and giving support to various PSU OMC’s in Indian market for Petrol and Diesel so that the consumers are protected from the volatility in the crude prices which in general is termed as Subsidy from consumer perspective and “ Under –Recovery” from the PSU OMC perspective.

India’s Petroleum Product subsidies: A Timewalk through

1939

Public Distribution System (PDS) for subsidized food started

Domestic oil prices based on import parity

1939–1945

Subsidized kerosene included in PDS for residential consumers

Late 1960

Subsidies for LPG introduced for residential consumers

1976

Petroleum prices fixed under the Administrative Pricing Mechanism

1989

Coupon system introduced to control access to subsidized kerosene in Mysore (program closed two years later)

2002

APM dismantled; petroleum prices (other than residential kerosene and LPG) liberalized

2003

Government intervention in petroleum prices

2006

“Rangarajan” committee report recommends liberalization of petroleum product prices

2007

“Smart cards” considered to control access to subsidized kerosene (program not adopted)

2008

“Chaturvedi” report recommends liberalization of gasoline and diesel prices and changes to fuel tariff and taxation regimes (recommendations not adopted)

2010

“Parikh” expert group recommends market-oriented pricing (Action plan to be implemented)

Informal price controls for the oil sector happened in the year 1939 when the OMCs started using the concept of import parity pricing. Year 1939 also marked the year in which PDS for subsidized food was launched with the aim of equal distribution of foods at outlets. World War II marked the time period when there was huge scarcity of kerosene in the market and need was felt to ration the distribution of kerosene through the outlets and thereafter kerosene was included in the list of PDS for the common man. The situation improved after World War II and the things were under control until 1957 government reintroduced the concept of PDS as way to control prices including kerosene. Government also introduced the subsidy for LPG in the later half of 1960 so that the consumer should shift the cooking base from other sources like cowdung cakes, biomass etc to LPG which is more healthy and has a high calorific value as compared to the sources which were being used in 1960s. government through various policies laid debt trap for the OMCs to subsidize LPG irrespective of the consumer purchasing power. After the launch of APM (Administered Price mechanism) the government continue to subsidise kerosene at expense of petrol and diesel prices. After the dismantling of APM regiem which lasted for more than two decades in india ,government tried to deregulate the oil sector but only on paper as from the next year thr price change need to be approved by Ministry. Considring the populous and Vote bank issues the price of kerosene has seen hardly any change since 2003 however the crude oil Indian basket has inflated in value terms many folds thereby increasing the underecoveries for the OMCs.

Subsidy bearing

Subsidy for the kerosene and LPG which as per government is intended as welfare measure and to insulate common man from the high prices is borne by government and oil companies.

Total Subsidy = Fiscal Deficit subsidy + subsidy by OMC’s

Fiscal Subsidy ( Scheme 2002- valid till 2014)

Government is trying to reduce the Fiscal subsidy on PDS kerosene and LPG . Subsidy on PDS Kerosene and Domestic LPG w.e.f April 2002 is met from the fiscal budget and has been fixed on a specified flat rate basis for each oil installation based on the difference between the cost price and the issue price per selling unit. The average subsidy during 2002-03 on PDS Kerosene was Rs.2.45 per litre & on domestic LPG at Rs.67.75 per cylinder. The flat rate subsidy was reduced by 33% each year during 2003-04 and 2004-05. Since then the subsidy rate for Domestic LPG and PDS Kerosene has been maintained at the 2004-05 level (i.e. 33.33% of 2002-03 level), i.e. 82 paise per litre for PDS kerosene and Rs.22.58/ cylinder for domestic LPG. The Government has made a provision of Rs. 2900 crore towards subsidy on these products in the fiscal Budget for 2010-11.

Subsidy on the petroleum products is met partly by the Financial budget and remaning by PSU OMC’s ( Oil Marketing Companies) . A comparative analysis of the subsidy components bear by the OMC’s and the budget clearly shows that PSU PMC’s are bleeding due to the policies imposed and simultaneously the subsidy component from budget is getting reduced every year. It would be significant enough to note that the total subsidy on PDS kerosene is much less as compared to total subsidy on LPG. This raises the question of whether universals subsidy model is still viable.

Subsidised kerosene is sold at much lower prices than petrol or diesel and is frequently diverted to parallel economy to be used as transport fuel . Approximately 50-60% of subsidized kerosene reache to the intended beneficiaries and remaining is seen as leakages from the distribution system. The NSSO data ( 50th round,55th ,61st round) clearly shows that purchase of kerosene during these time periods has remain more or less constant which is not possible considering the sales of OMCs.

Source : NSSO , Ministry of Statistics and Program implementation

Subsidy in 2010-2011

Year 2010-2011 is also witnessing increasing in crude price. Crude prices are crossing 90 us$ per barrel and as the crude oil price increases ,the subsdies continue to increase. OMCs incur a loss of Rs 6.09 per a litre of diesel, Rs 17.72 per a litre of kerosene and Rs 272.19 per LPG cylinder which consumer consumes. The government had paid Rs 26,000 crore in 2009-2010 to cover up for more than half of the revenue losses of OMCs. At the current price levels of Indian basket of crude it is expected that OMCs would loose 68,361 crors and the oil ministry expects at least half of the amount to be borne by Finance ministry ie it is straight impact on the Fiscal deficit .government has already paid Rs 13,000 crores to the OMCs as part of Under recovery who have lost Rs 31,367 crores till December 2010.

http://epaper.timesofindia.com/Repository/getimage.dll?path=ETM/2010/12/28/1/Img/Pc0011400.jpg

Issues & Challenges in subsidy

Subsidy not reaching the intended beneficiaries

Leakages in the distribution structure

Black market

Diversion

Gives rise to black money and parallel economy

Adulteration of other fuels

Give rise to high tax structures on other fuels thereby further increasing their cost.

Increase in Fiscal Deficit as part of the subsidy is borne by Finance Ministry through budget.

Way Forward to handle subsidy

There is no doubt that country like India wherein people are still poor and live in villages where electricity still has not reached ,kerosene needs to be subsidized as majority of kerosene is used for lighting purpose as compared to cooking utility. However the universal subsidy concept need to be changed and following alternatives can be worked upon

UID cards : Government is implementing Unique Identification Number project and is planning to roll out for all citizens of India in next two years time. The subsidies can be linked with the UID number along with Census survey results. This will ensure that intended beneficiaries are really receiving the benefits of subsidy.

Use of Solar lanterns : With the advent of technology, solar lanterns are available in India. The solar lanterns are powered by sun energy and there is only initial cost of procuring the lanterns and one time procurement cost is also subsidized by government.

Availability and accessibility of electricity : Electricity needs to be reached to all villages so that people dependence on kerosene as lighting fuel is removed completely which will reduce the sale of kerosene and thereby reducing subsidy and improving the Fiscal deficit of the country.

Price of PDS kerosene is low as compared to other neighboring countries which encourage cross border smuggling and adulteration.

Source :PPAC

Price rise wil help in reducing the componet of subsidy and also prevent unethical activites across borders.

Price rise can also be linked with change in agricultural GDP. It has been seen that the price of kerosene has remained stable at Rs 9 per litre even though the agricultural GDP has risen over the years. The rise in agricultural GDP signify that people can increase their expenditure to some fraction and can be n synchronisation with the agriculture GDP.

Source :PPAC

Coupon System : In 1989 the coupon system was introduced in Mysore which had very successful results. In this system consumers were provided with coupons and these coupons were given to PDS shopkeeper. People could go at their convenience as shopkeeper would be selling based on coupons. These coupons would be deposited by PDS shopkeeper and incase the coupons received are short as compared to the quota allocated his supplies would be reduced or may be debarred. The system rolled out was successful in preventing leakages form the system, however the system could not run due to strong lobby by politicians and kerosene dealers. Such type of system with enhanced security framework can be launched so that Conditional subsidy can be aimed.

LPG subsidy – way forward

LPG being a product which is normally used by peole in urban areas who can afford to use the cylinders at increased prices.

UID : UID or smart cards can b implemented as in case of kerosene subsidy.

Deregulate the sector : The LPG sector can be deregulated gradually for all urban areas so that the subsidy burden is removed and only a fraction of subsidy would remain for rural consumers.

Conditional Direct Cash Transfer : As in case of health sector where government has successfully launched the conditional cash transfer scheme under the banner of NRHM , similar scheme can be launched wherein all consumers can be charged the market price of the cylinder however intended beneficiaries can still get benefit by government giving them cash return through the banks .

Oil Bonds

Introduction

Oil bonds were introduced in the Indian oil sector around a decade back during the tenure of UF Government . Oil sector is the largest tax contributor to the Central exchequer and adding more than 75,000 crores on account of Customs and Excise duties.

The petroleum products pricing ( even though APM was dismantled in 2002) are still controlled by Indian Government and the OMC’s are not allowed to price the products in line with basic principles of Economics ie based on Supply- Demand principle. The petroleum products are being sold at price less than the cost price to the refiners.The gap between the price of product in the market and cost give rise to Under Recoveries which is partially refunded in the form of Oil bonds. The paradox in the oil sector is amazing, on one side the government imposes hefty taxes on the products ( more than 50% on petrol and 35% on diesel) on the retailing price of the fuel. Since the basic price is high ,the tax component raises the bar further and the price of petroleum products is seen in so called “Unaffordable Category” for the common mass. Inorder to insulate the common man the government steps in and subsidize the fuel which takes the special form of oil bonds. The paradox lies in the fact that prices are high due to tax component and then government are themselves subsidizing the same.

Oil Bonds vs Subsidy

Government earlier supported the under -recoveries of the OMCs with combination tool of Oil bonds and cash subsidization. Oil bonds are the desired form of subsidy by the government as due to our cash based budgeting structure the financial entries pertaining to issue of oil bonds can be kept away from the balance sheet of the government ie the budget. It is more significant in the current times when Government has the mandate under Fiscal Responsibility and Budget Management (FRBM) Act, 2003 wherein government is committed to eliminate revenue deficit through an annual reduction of 0.5 percentage points. Also Government does not have to shell out money from the central coffers immediately as the bonds mature over a period of time and only intrest component needs to be paid to the OMCs at regular intervals ( mostly on annual basis). Hence government was having double advantage by issuing the oil bonds as it an meet it fiscal deficit on papers and on other end deffering the payment to oil companies in the fom of cash in the same year.

However in case of subsidies to OMCs ,through the mode of cash transfer to oil companies the economic equation changes drastically. In this case the cash is transferred same year ( on half yearly basis or quarterly basis ) which results in depletion of savings of the government and thereby increasing the Fiscal Deficit figures in the budget. With the higher Fiscal Deficit the government borrowings increases which can push the interest rates further up in the market . The intrest rates can have lot of impacts as the businessman may try to defer the new plants or investments which can ultimately lead to lower levels of GDP as compared to the projected levels of GDP.

Operationalising of Oil Bonds

The concept of oil bonds being given to Oil marketing companies to cover their losses on account of under recoveries was not put in practice in the truest sense as it was designed. The government was supposed to reimburse the entire cost of under recoveries for which OMC’s were bleeding however as in the FY 2007-08 the under recoveries were at around Rs 70,000 crores but the government paid half of the amount in form of oil bonds , 33% to be borne by upstream oil companies ( Upstream oil companies are one which are involved in exploration and production activities of the oil sector ) and remaining 17 % by OMCs. The modality of distribution was not as conceived earlier and OMCs painfully tried to absorb the 17 % from their profits ,making the companies facing the red bottom line. Also the govement paid only 11,257 crores and the remaining amount fate was hanging for which OMCs were groping the dark.

The above example shows that inspite of model being available to government the OMCs were not reimbursed as they should have been reimbursed and the companies were forced to bleed and remain in bloodbath of under recoveries. It raises questions about the modus –operandi of the Government policies and procedures.

http://epaper.timesofindia.com/Repository/getimage.dll?path=ETM/2008/05/14/7/Img/Pc0071300.jpg

The under recoveries has increased over the years as depicted in the chart below and Government issued mass oil bonds to offset the deficit in financial figures of the OMCs and thereby manitaing their financial health.

Chart : Under-Recovery Burden and its components

The Oil bonds issued by the Government are matured over a period of 5 -7 years and also vary in their status of tradability. The bonds can be tradable bonds 9 which can be sold in the bond markets immediately) and the other category Non-Tradable bonds ( which cannot be traded in the agile bond markets however they can be used as collateral security for financing purpose). Oil bonds also does not enjoy the status of Statutory Liquidity Ratio (SLR) and it cannot be accounted for SLR requirements on the balance sheets of banks as liquid assets.

http://epaper.timesofindia.com/Repository/getimage.dll?path=ETM/2008/07/04/1/Img/Pc0012100.jpghttp://epaper.timesofindia.com/Repository/getimage.dll?path=ETM/2009/12/23/13/Img/Pc0130900.jpg

Oil bonds were issued primarly to compensate the OMCs and to improve their financial performance however all the OMCs found it challenging enough to trade the bonds and to maintain their financial health ,the bonds were normally discounted by the OMCs in the banks to earn hard cash which was required to purchase Crude oil . There are primarily two reasons for the same

Saturation of bonds market : The Bonds were supersaturated with the various types of bonds floating in the market as oil bonds , fertilizer bonds, government security bonds etc Based on simple micro economic principle of Demand Supply, since the supply is more demand is less and the price also sees downward trend.

Non SLR status : the government has purposefully defined the bond in category of Non SLR . Non SLR status did not motivate the banks to honour the bonds as by keeping the bonds for a period of 5-7 years the banks cannot take these bonds worth crores of rupees for meeting the SLR requirement of RBI. Incase the bonds had been allocated the SLR status ,banks would have merrily met their RBI requirement of SLR from these bonds and would have invested their liquid assets in more return area thereby ensuring win win situation for both ie the banks and the OMCs.

Considering the above and the urgency of OMCs to have cash n hand to purchase high value crude these bonds were encashed by Bills discounted techniques and apart from the under recovery losses ,the OMCs were forced to bear the additional burden.

Apart from under recoveries which are forced on the OMCs ,the other perspective for the issue is that this price controlled mechanism is applicable to PSU’s and not for private sector . this leads to differential marketing strategy for example Reliance Petroleum is exporting the entire product at the prices which are related to global price index level and Indian PSU OMC’s are bleeding . Indian Government has recognized the challenges as listed above regarding the issues with bonds and has discontinued the practice of issuing bonds to the OMC’s and the subsidies are handled as Cash subsidies in sharing mode.

Restructuring of Taxes and Duties

GOI has complex system of taxes in the petroleum sector. Crude oil and Petroleum products as diesel, petrol are the major sources of revenue for Central as well as State Goverments. In the present structure a mix of specific duties and Ad-Valorem taxes are imposed on the Petroleum products.

GOI inorder to reduce the burden of Under-Recovery on OMC’s , needs to rationalize the complex tax and duty structure in line with the subsidy and the issue of bonds. Since the tax component in products as Petrol is as high as 50 % , the tax component after rationalizing will definitely reduct the burden of subsidies on OMC’s.

Period : 2010-11 (effective 27-02-10)

CENTRAL EXCISE AND CUSTOMS TARIFF TABLE

Particulars

 

CUSTOMS

CENTRAL EXCISE

 

Basic

Customs Duty

Additional Customs Duty (CVD)

Additional Customs Duty

Basic

Cenvat Duty

Special Additional Excise Duty

Crude Petoleum

 

5% + Rs. 50/MT as NCCD

 

 

Nil+Rs.2500/MT

as Cess+

Rs.50/ MT as NCCD

 

Petrol

 

7.5%

Rs.6.35/ltr. + Rs.6.00/ltr SAD

Rs.2.00/ltr.

Rs.6.35/ltr

Rs.6/ltr

Petrol (branded)

 

 

 

 

Rs.7.50/ltr

Rs.6/ltr

High Speed Diesel

 

7.5%

Rs.2.60/ltr.

Rs.2.00/ltr.

Rs.2.60/ltr.

 

High Speed Diesel (branded)

 

 

 

Rs.3.75/Ltr

 

LPG

Domestic

Nil

Nil

 

Nil

 

Non - Domestic

5.0%

8.0%

 

8.0%

 

Kerosene

PDS

Nil

Nil

 

Nil

 

Non PDS

10.0%

14.0%

 

14.0%

 

Aviation Turbine Fuel

Nil

8%

 

8%

 

Naphtha

Non- Fertilizer

5.0%

14.0%

 

14.0%

 

Fertilizer

Nil

Nil

 

Nil

 

Bitumen & Asphalt

 

10.0%

14.0%

 

14.0%

 

Furnace Oil

Fertilizer

Nil

Nil

 

Nil

 

Non- Fertilizer

10.0%

14.0%

 

14.0%

 

Light Diesel Oil

 

10.0%

14% +

Rs. 2.50/ Ltr

 

14% +

Rs. 2.50/ Ltr

 

Liquified Natural Gas

5.0%

Nil

 

Nil

 

Low Sulphur Heavy Stock/ HPS & other Res.

Fertilizer

10.0%

Nil

 

Nil

 

Non- Fertilizer

10.0%

14.0%

 

14.0%

 

Lube oil/greases

 

10.0%

14.0%

 

14.0%

 

Natural Gas[Gasious state]

5.0%

Nil

 

Nil

 

Petroleum Coke

 

5.0%

14.0%

 

14.0%

 

Petroleum Jelly

 

10.0%

14.0%

 

14.0%

 

Waxes all types

 

10.0%

14.0%

 

14.0%

 

NOTE:

- Additional Duty of Customs @4% would be levied in lieu of sales tax / VAT except petrol, diesel, SKO(PDS), LPG(Dom), coal, coke and petroleum gases and fuels of Chapter 27 on direct imports for consumption.

- In addition to above, Education Cess @2% on aggregate duties wll be charged w.e.f. 9.7.2004 and additional 1% will be charged w.e.f. 1.3.2007.

- Source : IOCL Tariff Statement

Table showing Sales tax on petroleum products effective 01.12.2010

Statement of State - Wise Taxes in % being recovered in Retail Selling Price (RSP) for sensitive petroleum products.

 

State & Taxes

MS

HSD

SKO

 

 

 

PDS

1

PUNJAB

 

 

 

 

VAT

27.50

8.80

5.00

 

Cess

Rs. 1000/KL

 

 

 

Additional Tax on VAT

10.00

10.00

10.00

2

JAMMU & KASHMIR

 

 

 

 

Sales Tax

20.00

12.00

 

 

VAT

 

 

5.00

 

Employment Cess

Rs.3000/KL

Rs.1000/KL

 

 

 

 

 

3

HIMACHAL PRADESH

 

 

 

 

VAT

25.00

14.00

NIL

4

DELHI

 

 

 

 

VAT

20.00

12.50

5.00

 

Air Ambience Charges

 

250/KL

 

5

HARYANA

 

 

 

 

VAT

20.00

8.8

5.00

 

Additional Tax on VAT

5.00

5.00

5.00

6

CHANDIGARH

 

 

 

 

VAT

20.00

12.50

5.00

 

Cess

Rs.10/KL

Rs.10/KL

 

 

Central State Tax

2.00

2.00

2.00

 

Note: CST is being recovered at 2% in retail selling price of domestic LPG in Chandigarh since pricing of the same is from a location in Punjab where CST @ 2% is applicable.

7

ASSAM

 

 

 

 

VAT

27.50

16.50

5.00

8

CHATTISGARH

 

 

 

 

VAT

25.00

25.00

4.00

 

Entry Tax

 

 

 

9

ORISSA

 

 

 

 

VAT

18.00

18.00

4.00

 

Entry tax

1.00

1.00

1.00

10

WEST BENGAL

 

 

 

 

Sales Tax

25.00

17.00

 

 

Sales Tax Rebate

 

Rs.(290)/KL

 

 

Cess

Rs.1000/KL

Rs.1000/KL

 

 

VAT

 

 

Nil

11

JHARKAND

 

 

 

 

VAT

20.00

18.00

4.00

12

MAHARASHTRA

 

 

 

 

VAT

25.00

23.00

5.00

 

Additional Surcharge

Re.1/Ltr

 

 

 

Note : In Mumbai, Thane and Navi Mumbai area, the rate of VAT for MS & HSD is 26 % & Additional Surcharge of Rs.1/Ltr on MS.

 

 

 

 

13

MADHYA PRADESH

 

 

 

 

VAT

28.75

23.00

5.00

 

 

 

 

14

GOA

 

 

 

 

VAT

20.00

18.00

5.00

15

TAMIL NADU

 

 

 

 

VAT

30.00

21.43

4.00

16

KERALA

 

 

 

 

Sales Tax

29.01

24.69

 

 

Social Security Cess @1% on Sales Tax

1.00

1.00

 

 

VAT

 

 

4.00

 

Social Security Cess @1% on VAT

 

 

1.00

17

PONDICHERRY

 

 

 

 

VAT

15.00

14.00

NIL

 

Central State Tax

2.00

2.00

NIL

18

RAJASTHAN

 

 

 

 

VAT

28.00

18.00

5.00

 

Cess

Rs.500/KL

Rs.500/KL

 

19

GUJARAT

 

 

 

 

VAT

23.00

21.00

NIL

 

Cess **

2.00

3.00

 

 

** Cess is on VAT+Town Rate, Town rate is is Assessable value+Exise duty+Delivery charges

20

UTTAR PRADESH

 

 

 

 

VAT

26.55

17.23

4.00

 

Additional Tax on VAT

 

 

1.00

21

BIHAR

 

 

 

 

VAT

24.50

18.36

4.00

22

UTTARAKHAND

 

 

 

 

VAT

25.00

21.00

4.00

 

Additional Tax on VAT

 

 

0.50

23

KARNATAKA

 

 

 

 

Sales Tax

25.00

18.00

 

Entry Tax

5.00

5.00

 

VAT

 

 

5.00

24

ANDHRA PRADESH

 

 

 

 

VAT

33.00

22.25

4.00

25

MEGHALAYA

 

 

 

 

VAT

20.00

12.50

4.00

 

Notes : Surcharge @ 2% on MS & HSD wef 31.12.1999.

26

MANIPUR

 

 

 

 

VAT

20.00

12.50

4.00

27

NAGALAND

 

 

 

 

VAT

20.00

12.00

5.00

 

Notes : Surcharge @ 5% on MS, HSD & SKO wef 16.11.2004

28

SIKKIM

 

 

 

 

VAT

15.00

7.50

NIL

 

Notes : 1. Sikkim Cess @ Rs. 2000/- on MS and HSD per KL wef 01.04.2006

 

2.Sikkim Consumer Welfare@ Rs. 20/KL on MS/HSD retail as Sikkim Consumer Fund wef 01.10.08

29

TRIPURA

 

 

 

 

VAT

15.00

10.00

NIL

30

ARUNACHAL PRADESH

 

 

 

 

VAT

20.00

12.50

4.00

31

MIZORAM

 

 

 

 

VAT

18.00

10.00

NIL

32

UT - DADRA & NAGAR HAVELI

 

 

 

 

VAT

20.00

20.00

4.00

33

UT - DAMAN & DIU

 

 

 

 

VAT

20.00

20.00

4.00

34

UT- LAKSHADWEEP

 

 

 

 

VAT

NIL

NIL

NIL

35

UT - ANDAMAN & NICOBAR ISLANDS

 

 

 

 

VAT

NIL

NIL

NIL

- Source : Sr. No. 01 to 24 : Based on HPCL Monthly Statement of Taxes.

- : Sr. No. 25 to 35 : Based on IOCL Monthly Statement of Taxes.

The above table on Customs and Excise and another table which enumerates the tax structure in various states clearly spells out the complexity involved in the tax structure which becomes more complex when cess is imposed on certain products .

The tax structure by the state governments also imposes certain cess on petroleum products which are not actually related to Petroleum products delivery however since the demand is conceived to be “Inelastic” the government imposes the cess or additional taxes for which the common man is unaware of as in the following states

Name of State

Cess for / Additional tax for

Rate at which applied

Jammu & Kashmir

Employment

Rs 3000 / Kl

Delhi

Air ambience charges

Rs 250/KL

Punjab

Reason not specified

10 %

Harayana

Reasons not specified

5%

Kerala

Social Security Cess

2% on VAT ,Sales tax

Gujarat

Reasons not specified

2 % -3 % ;Cess is on VAT+Town Rate, Town rate is is Assessable value+ Exise duty+ Delivery charges

Sikkim

Sikkim Consumer Welfare fund, Sikkim Cess

Rs 20/ KL for welfare, Rs 2000/ Kl on Sikkim cess

As seen from above table the State Government imposes taxes/ cess for Air ambience charges or welfare fund and in some cases the consumer is not even told why the cess has been applied on the prices. The taxes are inbuilt and even the bills which are dispensed to the consumers does not give the breakup of the basic price and taxes involved keeping the consumers in dark. On the other hand Government is providing subsidy to NE states ( which s released by Center) and on the other hand the state GOverments are increasing the price by way of additional taxes or cess , thereby filling their own state coffers and leaving the consumer bone dry. While the GOI has shown willingness to rationalize the taxes structure , however state governments have been mostly unwilling to undermine this price issue and inelastic source of revenue. It is also significant to note that most of the states in India have moved their tax structre to flat structure instead of ad-valorem type structure so that in case of price fluctuations their revenue remains committed. As shown in chart the revenue collection of Center fluctuates as GOI tries to rationalize the duties however states revenues has gone up in the years from Rs 60,000 crores to Rs 70,000 Crores ie difference of 10,000 crores in just 4 years. It alos implies that considering the population of 100 crores in India , each citizen irrespective he is consumer or not is contributing / spending Rs 25 per year extra on account of increase in State Taxes on Petroleum Product.

Thus there is clear emerging issue of “ Fiscal Imbalance” within the system of Petroleum Market. On the one front , Central Government is rying to cut the taxes and duties but increasing the financial outlays in the form of bonds and on the other war front the states continue to reap tax revenues from the common man.

Is Cutting Tax the solution ?

Central Government has tried to reduce the tax burden but simply cutting the tax rates at the center level and states increasing at states level does not address the ssue of petroleum privcing in india . Infact by cutting taxes GOI riskes undermining a crucial input of revenue source ( which can be used for various other social activities like NRHM, Infrastructure development) , while proviing only a partial solution to the pricing issue. In fact, by cutting taxes it undermines its ability to fund the rapidly increasing outlays required to support the subsidies regime. Also by reducing taxes now will make it very difficult for future governments to raise taxation rates on petroleum products in the future, which can deprive policy makers of a key demand-side management of Fiscal Deficit in India. This complex system of taxes and duties need to be rationalized so that common person has the visibility of the contribution to the exchequer.

Fiscal and Macroeconomic Instability

The ever increasing subsidy burden on Indian Budget and Under recoveries of OMCs have dented deeply the Indian fiscal and macroeconomic environment.

Source : PPAC

In the year 2008-2009 the tax component received by the government and the total under recoveries are nearly balancing as the subsidy burden is continually increasing and the GOI has reduced taxes on certain petroleum products thereby reducing the gap between revenue and expenditure on year to year basis. With the ever increasing expenditureand falling revenues, the GOI is finding it difficult to sustain the concept and forcing government to consolidate its spending pattern in other areas of budget or may it has shown unwillingness to cater to the increasing rift between revenue and expenditure. In the current year the Government has directed that part of the oil subsidy needs to be borne by the OMCs.

The peaks in the oil bonds has led to considerable budgetary gaps in Indian Budget. With the decrease in revenues and continually rising expenditure the government Fiscal deficit more than doubled from 2.56 % ( FY 2007-2008) to 6.05 % in FY 2008-09. Total state and government debt is being estimated to be 72 % of GDP in the FY 2009-2010.

Source : RBI table no 234

Source : RBI table no 237

India has been rated on Economic scenario as

Baa3 : Moody’s

BBB- : Standards & Poors (S&P)

BBB- : Fitch

The rating gives as indication to the outside world how stable the country is in terms of Economic parameters. S&P has commented in their report that India’s fiscal deficit is entirely unsustainable in the medium-term and has warned that without tangible signs of fiscal tightening, it will downgrade India’s sovereign credit from BBB (its lowest investment grade) to “junk” status rating . Incase the ratings are downgraded it will only worsen the effect of large-scale oil bond issuance on the health of government

finances. Due to the result of several years of accumulated off-budget debt issuance, 24% of general government revenue goes as interest payments on government debt. Sovereign “junk” status will force investors to demand higher interest rates on Indian government paper, both for oil bonds, other off-budget debt issuance and general government borrowings – which itself will increase the proportion of the GoI’s revenues devoted simply to interest payments on debt. Also if oil bonds are given greater SLR status, general government borrowings will have to compete with these securities for buyers – again putting upward pressure on government paper interest rates.

Print Email Download

Share This Essay

Did you find this essay useful? Share this essay with your friends and you could win £20 worth of Amazon vouchers. One winner chosen at random each month.

Request Removal

If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on the link below to request removal:

Request the removal of this essay.


More from UK Essays

Paid Writing Services

Free Content

About UK Essays

Order Now

Instant Price