Know Why Fuel Prices Are So High In India?

Bhubaneswar: The prices of petrol and diesel has been on a constant rise on a daily basis for around couple of weeks across the nation. This has severely pinched the middle class which is already impacted by the pandemic. Ironically, though the base price is very low, the consumers are unable to reap the benefits.

In India, the petrol price has touched even the ₹100 mark in some States. There are two major reasons for this hike in fuel price.

Increase in Price of Crude Oil in the International Market

The price of petrol and diesel in India are directly proportional to the international market rates of crude oil. If there is a rise in the price in the international market, it would correspondingly increase in India and vice versa.

In April last year, due to the Coronavirus pandemic and worldwide lockdowns there was a considerable decrease in demand of crude oil resulting in a collapse in its price. It had touched a historic low of $19 a barrel. So, to boost the sales amidst pandemic, the Organisation of Petroleum Exporting Countries (OPEC) and allies had cut oil production by 9.7 million barrels per day (including Russia) in May 2020.

On top of it, Saudi Arabia decided to cut the output by 1 million barrels per day in February and March this year only to push up the prices and recover the losses incurred during the pandemic.

The cut in output coupled with the recovery in demand served a major catalyst in spiking up the prices.And after the vaccine rollout, the the rates were increased to USD 63.49 for Brent crude from USD 40.

Amid rising fuel prices, Union Petroleum Minister Dharmendra Pradhan has urged the Organisation of the Petroleum Exporting Countries (OPEC) members to “stop regulating crude oil production” and ease rates.

Exorbitant Taxes Imposed on Fuel by Central and State Government

Though the government is blaming on the rising price of crude oil in the international market as the main reason of the hike, but it is not the case. The main reason of the spiralling prices is the exorbitant taxes imposed by both the Central and State government. Fuel, being essential commodity for transportation has inelastic demand which means even if there is a steep rise in the prices, it has a very less impact on the demand.

This factor is encased by the government and they have levied high taxes on it. At present, high level of excise duty (by Centre) and VAT (by State) contributes to 63 per cent of petrol and 60 per cent of diesel costs.

So, consumers should note that a bulk of the fuel cost they incur goes towards taxes.

The Mechanism of Taxation

Petrol: This can be explained through an example. The retail price of petrol in Delhi on January 1 was ₹83.71 per litre. According to Indian Oil website, the base price of the fuel was ₹27.37 per litre. Adding freight charges of ₹0.37 per litre, it was provided to the dealers at ₹27.74 per litre (excluding excise duty and VAT)

Excise duty of ₹ 32.98 and the dealer commission of ₹3.67 per litre is then added to it making the price to ₹64.39. On this, further add VAT or value added tax (including VAT on dealer commission) of ₹19.32 per litre. Then comes the final retail selling price of petrol of ₹83.71 a litre ((January 1 price) in Delhi.

Diesel: Based on the January 1 price of diesel in Delhi of ₹73.87 per litre, the base price was ₹28.32 per litre as per Indian Oil website. Add to it freight charges of ₹0.34 litre, the price charged to dealers (excluding Excise Duty and VAT) comes to ₹28.66 per litre.

Then add excise duty of ₹31.83 per litre, dealer commission (average) ₹2.53 litre and VAT (including VAT on Dealer Commission) ₹10.85 litre, the final retail selling price in Delhi comes to about ₹73.87 per litre (January 1 price).

So, the taxes you pay on petrol roughly exceed Rs 50 per litre, while for diesel it is over Rs 40.

Why the Government is not reducing Tax?

In spite of resentment among the public, the central government has clearly stated that it will not cut excise duty on crude oil to give relief to consumers from the spiralling retail prices of petrol and diesel.

Union Oil Minister Dharmendra Pradhan had stated that the Centre and state governments rely heavily on collections from taxes on crude oil “for meeting their developmental and welfare priorities” in a reply in Rajya Sabha.

“They need some resources… (and) this (taxing petrol and diesel) has been a proven and substantial route by all the governments, whether the state governments or the central government,” he had said.

“Both the states and the central government are raising taxes according to their developmental needs,” he added.

Taxes make up for over 61 per cent of retail petrol price while they constitute more than 56 per cent of diesel price.

Why is GST not applied to Petrol and Diesel?

GST promised one nation, one taxation policy. If petrol and diesel are brought under the ambit of GST, then the Centre and State won’t be able to levy excise and VAT on it. The highest slab of GST is 28 percent. If a special slab of 50 percent GST is applied on petrol and diesel, the price won’t go beyond ₹50.

Since inception of GST, theCentre and State governments are blaming each other for not being able to bring it under the ambit of GST.

Fuel Price In Neighbouring Countries

Petrol is much cheaper in our neighbouring countries.

When compared to India as per Indian currency, the petrol price in our neighbouring Pakistan is ₹51.14, whereas in Sri Lanka its ₹60.26. The petrol price in Bangladesh is ₹76.41 and in Nepal ₹68.98. It’s cheapest in Bhutan at ₹ 49.56.

Countries Having Cheapest Petrol

In Venezuela’ petrol is sold at ₹1.45 per litre whereas in Iran, it is ₹4.50 per litre. In Angola, the petrol price is ₹17.82 per litre, Algeria ₹25.15 per litre, and in Kuwait, it is sold at ₹25.26 per litre.