What is decontrol of fuel prices and how does it actually work?
Price decontrol essentially offers fuel retailers such as Indian Oil, HPCL, BPCL the freedom to fix prices of petrol or diesel based on calculations of their own cost and profits. Essentially a factor of the price at which the source of their inputs from upstream oil companies such as ONGC Ltd or OIL India Ltd, for whom the price benchmark is derived from global crude prices.
Fuel price decontrol has been a step-by-step exercise, with the Indian Government freeing up prices of ATF (Aviation Turbine Fuel) in 2002, Petrol in 2010 and Diesel in 2014. Prior to that, the Government used to intervene in fixing the price at which the fuel retailers used to sell diesel or petrol. While fuels such as domestic LPG and kerosene still are under price control, for other fuels such as petrol, diesel or ATF, the price is supposed to be reflective of the price movements of the so-called Indian basket of crude oil (which represents a derived basket comprising a variety of ‘sour grade’ (Oman and Dubai average) and ‘sweet grade’ (Brent) of crude oil processed in Indian refineries).
Do OMCs (Oil Marketing Companies) also benefit?
The only entity that benefits at the consumers expense is the government. In fact, both the Central and State governments. OMCs, interestingly, are also among the losers from the sharp downward gyrations in oil prices. The problem for companies such as IOC or BPCL is that a continuous slide in fuel prices leads to the prospect of inventory losses. Inventory Loss is a technical term for the losses incurred when crude oil prices start falling and companies that have sourced the crude oil at higher prices discover that the prices have tumbled by the time the product reaches the refinery for processing or the finished product is ready for selling.
Including both crude oil and products, companies such as IOC keep an inventory of about 20-50 days. For oil refiners, the inventory loss was pegged at over Rs.25,000 crore in the January-March quarter because of the 70 per cent fall in crude oil prices.
Why haven’t consumers benefited now despite the sharp fall in crude prices since February?
Crude prices nosedived from an average of about $55/barrel in February to $35 in early March, and then falling to $20 by end March as demand slumped because of the pandemic. From that point, the prices have recovered to around $40-$45 now. On the other hand, in India, retail prices of fuel were frozen for record 82-days that covered much of this period, even as the excise duty on fuels was hiked by the Centre twice.
While the Indian Government claimed that the impact of the hike was not passed on to consumers, the latter, however, did not benefit from this fall in crude oil prices to record low levels. Apart from the Centre, a number of states too hiked the levies on auto fuels during this period. The decision to raise the duties, was taken in view of the tight fiscal situation and that retail prices were unchanged (a statement from the Finance Ministry).
So, effectively, the excise duty hikes by the central government was to be adjusted by the OMCs against the fall in oil prices. But now, the retail prices are being progressively hiked.
As of now the current petrol and diesel prices in some of the cities in India are-
Why Petrol is not under GST?
A new taxation system known as the Goods and Service Tax (GST) was introduced in India from 16 July 2017. However, five petroleum products such as petrol, diesel, natural gas, crude oil, and Aviation Turbine Fuel (ATF) were exempted from the GST. This is because, both the Centre and states were not in favor of GST levied on the sale of petrol and diesel. By bringing petrol and diesel under the GST, the Centre could lose up to Rs.20000 crore as revenue generated through excise duty, while the states wanted to keep their revenue pool intact for any contingency.
Also, the total tax incidence of excise duty and VAT is about 45-50% on petrol, while diesel attracts about 35-40%. Under the GST, the highest tax incidence is 28%, thereby reducing the revenue generated by both the Central government and states. The GST is charged as a percentage on the ex-factory price of the commodity which could have a huge impact on the final selling price whenever the refinery price is hiked amid the rise in crude oil prices in the international market and it could be true vice versa as well.
If petrol is brought under the ambit of the GST, the final price we pay towards the purchase of petrol will certainly decline, benefiting consumers the most. All said and done, we need to see if there will be a different tax structure for petroleum products as they are a huge source of revenue for both the Centre and states.
From all the events which are unfolding and unfolded in the recent past, it is clearly visible that the fuel prices either remain in the same level or increase further on. Once the economy is back on track, it surely will take some time then we a common man can have a breather from the fuel price hike.
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PK,
PK Enterprises.
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