ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Politics of Inflammatory Oil Price Rise

Convoluted petrol and diesel taxes only fill central coffers at the expense of consumers and states.


Why do oil prices always go up but hardly ever come down? It is a riddle that both puzzles and irks most people. And this has been especially so since oil companies have been allowed to fix prices on a daily basis since June 2017 to reflect global price trends. And the current spike has been particularly severe as petrol and diesel prices have unremittingly soared by around 29% in less than a year. In Delhi, the capital city, retail prices of petrol and diesel went up from a low of `69.6 and `62.3 per litre in mid-April 2020 to touch a high of `89.9 and `80.3 by mid-February 2021. ­Normally, retail oil prices fluctuate up and down every few weeks or in one or two months. But this time, the upswing has been lengthy as the price of oil imports has steadily shot up from $19.9 per barrel in April 2020 to a high of $54.8 in January 2021, claim the oil companies.

But links between domestic retail prices of petrol and diesel and crude oil prices in global markets are very tenuous. The reality is that the price charged by oil companies to retail pumps is only around a third of retail prices of both petrol and diesel. The rest, that is, close to two thirds of the retail prices are mainly contributed by taxes. And this is without accounting for the 2.5% customs duty and 3% social welfare surcharge on crude oil imports, which will push tax share in total retail prices of petrol and diesel even higher.

An investigation into the build-up of retail price of petrol and diesel shows that the primary reason for the high oil prices is the increasing incidence of oil taxes. Six years ago, in late 2015, just a year and a few months after the current National Democratic Alliance government was sworn in, the petrol prices charged by oil companies to retail pumps in Delhi were `28 per litre, almost the same as in early January 2021. However, the retail price of petrol has now gone up by 37%, from `61 to `84 in this period. The reason is that excise duty levied by the central government on petrol has gone up by an astounding 73% during these six years, while value added tax levied by the states has increased by 53% during the same ­period. Clearly, the higher retail price is the outcome of the higher taxes levied on petrol by the centre and the states. The same applies to diesel.

Oil is closely associated with high taxes the world over. Numbers for the G7 countries show that for every litre of oil sold, around one third is crude oil price, 18% is industry margin and 50% is taxes. In some countries like the United Kingdom and Italy, taxes are 60% of the retail prices. Clearly, petrol and diesel taxes in India, which are around two thirds of the retail price, are on the higher side both in comparison with rich countries and also with most of our neighbouring countries.

The high taxes on oil products have been a money-spinner for both the centre and states. The recent estimates for 2019–20 show that the total direct and indirect taxes levied by the centre and the states on the oil sector are a huge `5.5 lakh crore, which is around 17% of the total taxes collected in the country and are about 3% of the gross domestic product. And trends from 2014–15 show that the share of oil taxes levied by the central government has gone up from 52% to 60% now, while that of the states has fallen from 48% to 40%, the latter mainly on account of dipping royalties on oil production and in octroi and entry taxes after the coming of the goods and services tax.

The actual losses of states in oil taxes are much larger. This is because the central government, which gets more than three fourths of its oil revenue from excise duties, has changed the excise duty structure to squeeze out the state’s share by reducing the share of basic excise duty, which is shared with the states, and mobilising a larger share of oil excise duty through surcharge and cess, which is its exclusive claim. Trends in excise duty collection show that the share of basic excise duty on branded petrol has been reduced from 42.6% in 2016 to just 12.2% now, while that on branded diesel has come down from 62.9% to 21% during the same period. Thus, the state’s share in the excise duty collections from petrol and diesel, which now exceeds `2 lakh crore annually, has shrunk substantially. Even in the case of custom duty collections, the states get no share of the 3% surcharge on crude oil imports. Clearly, the biggest gainer from the rising retail prices of petrol and diesel has been the centre at the expense of both consumers and the states.

The oil sector has been an easy pick for governments mainly because demand for oil is price inelastic and it falls on the ­ultimate consumers making it less distortionary. More importantly, the middle class that bears the immediate brunt of oil price increases, from disproportionate increases in their transport costs, has very little political heft to resist such price hikes. Clearly, the central government, which has generously given the corporate sector hefty tax cuts, is now scourging the last ­rupee from petrol and diesel consumers and states to refill its coffers to the maximum possible extent.


Updated On : 21st Feb, 2021


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