The Fuel Price Conundrum

Over the past few weeks (and once in a while per month) we have been listening, reading and watching facts, analysis and reports on how the global crude oil price has come down but the retail price of Petrol and Diesel have remained high.

The outrage is real and grounded on facts. As many have called it, it’s a loot (notwithstanding the legality of taxes). Multiple articles have been written on how crude oil prices have crashed globally and how the taxes and its components are abnormally high. So, this article will stay from those factual and legitimate demand of reducing retail sale price.

This piece will leave the state government for now. The focus is on central government. That is not to say that state governments have not been levying taxes on these commodities.

Central & State Revenue vs Crude Oil Price
The above data is taken from here.

As you can see, as the price of crude fell from 2014, the major revenue gainer is the central government.

So, how does central government make money on fuel trade.

  1. Excise, Customs, Service Tax and others
  2. Royalty
  3. Cess

These are clubbed as Indirect taxes.

However, these are not the only revenue the government receives. By virtue of owing majority of stake in Oil Marketing companies and various other companies in the trade from exploration to marketing, the government also earns direct taxes and dividends. These are:

  1. Corporate/Income tax
  2. Dividend
  3. Profit on exploration

However, the government also spends money on fuel in the form of under recovery. One of the most debated topics on subsidy front and always associated with the word burden. So, when we point the revenue of the government, we must also consider the expenditure side. Below chart enumerates how revenue and expenditure stands.

Central & State Revenue vs Crude Oil Price vs Under Recovery
As the global crude oil price fell,  ‘under recovery also fell.’ Not only this. There is no subsidy on petrol and diesel anymore. The under recovery are on kerosene and other commodities. The under recovery now stands at only Rs. 22,738 crore for the year 2016-17.

Details are here.

Given this, the logical argument and the rational argument must be that the government reduce taxes so that the benefit of low global prices are passed on to consumers.

Herein starts the conundrum.

Indirect Tax:

Ignoring the direct tax revenue of corporate tax and dividends and net of under recovery, upto the year 2013-2014, the government had in fact earned a loss. That means, the under recovery was more than the taxes levied. However, things have changed in the last few years and this is how it stands now.

Tax net of Under Recovery
So, from incurring a loss of 13% of indirect tax, we are now in a position where various taxes and cess contribute to 29% of the overall indirect taxes.

Hence, question is, will the government, which is not sure about GST tax collection reduce taxes on fuel? The answer seems obvious.

Even more colourful is when we add crude oil prices.

Indirect Tax contribution vs Crude Price
So, this chart begs the question, is the growth in indirect tax collection only due to removal of subsidy on major fuels and reduction in global oil prices?

Inclusion of Direct Taxes:

Since the government earns corporate taxes and dividends from OMCs, it is fair to compare the impact of this against direct taxes. It would not be fair to compare direct taxation of fuel related business to the overall direct tax base. Because, the direct tax base is diverse and includes personal tax and corporate taxes. Hence, the total of direct and indirect is included for fair comparison.

Overall Tax vs Combined Taxes from Fuel

Until 2014, the fuel trade, taken with under recovery had in fact been a drag. In other words, government lost money in terms of subsidies. Today, the overall direct and indirect contribution of fuel trade stands at 14.7% of our overall tax collection.


Another aspect to question is the impact of fuel on inflation. What will be the impact of consumer price index when the taxes reduced and the price at retail end reduced? We are staring at a situation where many see a minor upward movement in inflation as positive. The reduction in prices will obviously be deflationary at consumer end. (Impact on WPI assumed nil for the bulk sales.)

GST Bogey:

Another argument presented these days is to include petroleum products in GST. In the right GST, every goods and services sold must be part of it. How will including petroleum products in GST bring down prices is unknown.  This implies that the states are taxing petroleum products disproportionately and somehow GST council can rein in this. Is it?

State vs Central Revenue from Petroleum Products

A simple glance at the data will tell us that it is not. Note the trend line in dotted red. This line states that the central revenue was growing faster than the state revenue from fuel taxes. So the argument falls flat that the GST somehow will bring the price down.

Not only this. But as pointed by Mr. James Wilson in his research post on decoding Petrol tax it is also clear that more than one lakh crore collected as additional duty is not shared by the Center. This clearly shows the enthusiasm of the center to force fuel in GST regime, detrimental to states’ financial plight.

It will also be interesting to know which states levied what percentage tax from 2012 to 2014. There must be a story to tell.

Thus questions in front of us are:

  1. Is the government disproportionately dependent on fuel taxes for its indirect tax collection?
  2. Has the government decided to increase its indirect tax revenue from mainly through fuel tax?
  3. What is the policy when the fuel prices rises, which it will, inevitably?
  4. Will a government wanting an inflationary trend – a derivative of growth – want deflationary impact?
  5. With private consumption, exports and private investment trending downwards, will the government forego precious revenue it can collect by way of various taxes on fuel.

In final analysis, this shows that the government believes in inefficient government spending by taxing rather than what could become efficient private consumption of individuals.

This shows an unimaginative government locked in policy blackout, devoid of ideas to give a boost to any of the components of the economy.

This shows an uncertain government unwilling to reduce the tax because it may affect its indirect tax collections.

As a wise man once said, “Violence is the last refuge of the incompetent.”

This is economic violence on the masses by the incompetent.



Other links to access data used in this post:


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