Published: 08th November 2021
What the FAQ: How are petrol prices determined in India, and how significant is the recent tax cut?
Few things are more political than petrol in India right now. Prices of petrol and diesel have been on quite the ride this year, and here are all the factors fueling this carousel
The Modi government's Diwali 'gift' to the citizens was a marginal reduction in taxes on petrol and diesel in the country. However, this decision failed to bring the kind of relief the administration probably expected from the scrutiny it has been under for the skyrocketing fuel prices this year. Petrol cost more than Rs 100 for the first time ever in the country in February this year, and those numbers have only been going up.
However, crude oil, from which petrol and diesel are extracted, has been seeing a dip in price. Why then have Indians been paying more than ever before for these essential fuels?
1. How are the prices of petrol and diesel determined in India?
Fuel prices are determined by state-owned Oil Marketing Companies, such as Bharat Petroleum, Indian Oil and Hindustan Petroleum. There are four contributing factors to the price of petrol and diesel in the country. India imports Brent crude oil from the Organisation of the Petroleum Exporting Countries (OPEC) countries. The crude oil is processed by boiling and then distilling to separate various fuels and gases. The base price for these fuels, such as petrol and diesel is set by the central government. The base price for crude oil, for example, on November 4 was Rupees 39.4 per litre, and the price of petrol after adding processing and freight charges was at Rupees 48.28 per litre. Then commission for the dealer at the petrol pump, central government's excise duty, and the state government's value-added taxes are added to that amount to determine the final price of the fuel in the respective state. Fuels are more expensive in states with lower demand.
2. Why were prices on the rise in recent times?
India's oil imports stand at 82 per cent, whereas it has 618.95 million tonnes of crude oil reserves. According to a report by Scroll.in, the base price of petrol has decreased from where it was at 47 per litre when the Modi government took charge in 2014, to 37 per litre in June this year. In fact, international crude oil prices dropped by 13% between 202-2021. However, central excise duty in India has only seen a steep rise from Rs 10 in May 2014 to Rs 32 in June this year. Earlier this year, then Petroleum Minister Dharmendra Pradhan claimed that the taxes were raised in order to provide for some post-COVID welfare schemes.
3. What will be the impact of the reduction in taxes?
Taxes make up a little more than 50% of the retail price of fuels in India. On November 1, the central government announced a Rs 5 per litre cut on excise duty on petrol, and a Rs 10 per litre cut on diesel. This meant that the VAT, which is charged by the states on the price after the excise duty is added, will also come down marginally. This led to the price of petrol falling marginally below the Rs 100 mark in a few states. However, the rise in petrol prices causes an increase in the cost of many goods and services. And experts have said that any reduction in the price of petrol will not be directly proportional to the decrease, if any, in the cost of these services. Thus, the impact of the rise in petrol prices reflects in the long run.
4. Why hasn't it been reflected in all states?
When the Modi government slashed excise duty on petrol and diesel last week, it had urged the states to consider reducing VAT too. Most BJP-ruled states such as Karnataka have followed these directions, and the price of petrol is down by Rs 13.35 in the state. However, some states such as Telangana, Andhra Pradesh, Delhi, Maharashtra and West Bengal have stayed put with their VAT. In fact, Telangana's Chief Minister K Chandrashekhar Rao slammed the Modi government for asking states to reduce VAT, when the rise in petrol prices is attributed to the hike in the excise duty by the central government. "Which fool will ask us to decrease VAT? The fool who increased it will have to reduce it," said the CM. The Jagan Mohan Reddy government in Andhra Pradesh also claimed that the centre has defaulted on its duty to distribute 41% of the taxes collected in the form of excise duty to states, and therefore shouldn't ask them to reduce VAT.