Source: The Indian Express
- Prelims: Current events of national and international importance(Customs duty, Excise Duty, Inflation, MPC).
- Mains GS Paper III: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment(Taxation, Monetary policy).
ARTICLE HIGHLIGHTS
- On Saturday, the Union government announced a reduction in the excise duty on petrol and diesel by Rs 8 per litre and Rs 6 per litre respectively and Rs 200 subsidy on LPG gas cylinders.
- Alongside, the government also reduced the customs duty on raw materials and intermediaries for plastic products and iron and steel.
INSIGHTS ON THE ISSUE
Context
Excise Duty:
- Excise duty is a form of tax imposed on goods for their production, licensing and sale.
- An indirect tax paid to the Government of India by producers of goods, excise duty is the opposite of Customs duty in that it applies to goods manufactured domestically in the country, while Customs is levied on those coming from outside of the country.
- Goods and Services Tax (GST), introduced in July 2017, subsumed many types of excise duty. Today, excise duty applies only on petroleum and liquor.
- The excise duty levied on petrol and diesel consists of:
- Tax component (i.e., basic excise duty)
- Cess and surcharge component.
customs duty:
- Customs Duty refers to the tax that is imposed on the transportation of goods across international borders.
- It is a kind of indirect tax that is levied by the government on the imports and exports of goods.
- Companies that are into the export-import business need to abide by these regulations and pay the customs duty as required.
- The customs duty is calculated based on various factors:
- The place of acquisition of the good.
- The place where the goods were made.
- The material of the goods.
- Weight and dimensions of the good etc.
- Customs duty in India falls under the Customs Act 1962 and Customs Tariff Act of 1975.
- India’s tariff system is based on the Harmonized System of Nomenclature (HSN) of the Customs Co-operation Council.
Value-Added Tax (VAT):
- It is also known as a goods and services tax (GST) in some countries.
- It is a tax that is assessed incrementally. It is levied on the actual transaction value of a product or service at each stage of production, distribution, or sale to the end consumer.
- VAT compensates for the shared service and infrastructure provided in a certain locality by a state and funded by its taxpayers that were used in the creation of the said product and service.
- From a global perspective, although there is not much difference between GST and VAT, in India the difference existed due to implementation.
- To eliminate the cascading tax effect GST subsumed many indirect taxes including VAT.
Fuel Pricing Mechanism in India:
- Petrol prices were deregulated in 2010 and Diesel prices were deregulated in 2014 i.e. now Oil Marketing Companies (OMCs) determine the prices of these products.
- These prices are not determined by the actual costs incurred by the OMCs such as Indian Oil, HPCL and BPCL on crude oil sourcing, refining and marketing.
- Trade Parity Price (TPP) is used to price these products.
Trade Parity Price (TPP)
- Petrol and diesel prices in India are determined based on prices of these fuels in the international market and not on the basis of crude oil prices.
- TPP is based on the calculation that 80 percent of petrol and diesel is imported into India and 20 percent is exported.
- While international petrol and diesel prices generally move in line with crude oil prices, it need not always be the case, given that demand and supply dynamics could be different.
- The pricing of petrol and diesel since 2017 is done through a daily pricing mechanism, based on a 15-day rolling average international rate.
Factors that determine the price of petrol and diesel in India:
- Trade Parity Price (TPP)
- Excise duty charged by the Central Government
- Value-Added Tax (VAT) charged by the State Governments
- Dealer commission to the gas stations
Determination of LPG prices in India:
- The prices for LPG (Liquified Petroleum Gas) cylinders are determined by the OMCs and revised in India as per import parity price (IPP).
- Import parity=cost of the commodity in the source location+cost of delivery to the destination.
- The IPP is calculated as per Saudi Aramco’s LPG price, the world’s largest producer.
- Goods and Services Tax are also factored in before determining the final LPG retail price in India along with currency fluctuations.
- The common practice is to revise the price of LPG cylinders on a month-on-month basis.
Reasons for variation in fuel prices
- External factors: The retail prices of petrol and diesel in India are linked to the international prices of crude oil, global crude oil prices play a key role.
- Internal factors: Taxes and dealers’ commissions impact the price of domestic petrol.
- Inter-regional variations: It is due to the different tax rates levied by the respective state governments on the same products.
- Freight charges: It depends upon the distance between the refining plant and the petrol pump; the farther is the petrol pump from the oil refining unit, the more is the freight charge.
Constraints of States in Lowering Fuel Taxes:
- Major Revenue Source:
Petroleum and liquor account for roughly a third of states’ own tax revenue, making it difficult for states to forgo a part of it. - Impact due to Pandemic:
The economic downturn and the pandemic had led to higher spending needs and reduced revenues. - States’ consolidated fiscal deficit had jumped from 2.6% of Gross Domestic Product (GDP) in FY20 to 4.7% in FY21.
● It is a destination based tax unlike the present taxation scheme which is origin based.
● Single tax on supply of goods and services, right from the manufacturer to the consumer.
● It is a value based tax as credits of input taxes paid at each stage will be available in the subsequent stages.
● The final consumer will bear only the GST charged by the last dealer in the supply chain.
● At the central level, following taxes are being subsumed under GST:
Central Excise Duty
Additional Excise Duty
Service Tax
Countervailing Duty
Special Additional Duty of Customs
● At the state level, following taxes are being subsumed under GST:
State VAT/Sales Tax
Entertainment Tax
Central Sales Tax
Octroi and Entry Tax
Purchase Tax
Luxury Tax
Taxes on lottery, betting and gambling
● GST on all goods and services except alcoholic liquor. Petroleum and petroleum products shall be subjected to the levy of GST on a later date as decided by the GST Council.
● GST is levied at four rates viz. 5%, 12%, 16% and 28%. The schedule or list of items that would fall under these multiple slabs are worked out by the GST council.
Taxation in India:
● Taxes in India come under a three-tier system based on the Central, State and local governments, and the Seventh Schedule of the Constitution puts separate heads of taxation under the Union and State list.
● There is no separate head in the Concurrent list, that is Union and the States have no concurrent power of taxation.
● Article 265: Any tax being charged has to be backed by a law passed by the legislature or Parliament.
● Article 269: Taxes Levied as well as Collected by the Union, but Assigned to the States (These include taxes on the sale and purchase of goods (other than newspapers) in the course of inter-state trade or commerce or the taxes on the consignment of goods in the course of inter-state trade or commerce.
● Article 270: Taxes Levied and Collected by the Union but Distributed between the Union and the States.
Harmonized Commodity Description and Coding Systems (HS)
● The Harmonized System is an international nomenclature for the classification of products.
● It allows participating countries to classify traded goods on a common basis for customs purposes.
● At the international level, the Harmonized System (HS) for classifying goods is a six-digit code system.
● The Harmonized System was introduced in 1988 and has been adopted by most of the countries worldwide.
Monetary Policy Committee (MPC)
● Under RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC).
● It shall determine the Policy Rate required to achieve the inflation target”.
● The decision of the Monetary Policy Committee shall be binding on the Bank.
● Composition: consists of 6 members:
1. RBI Governor as its ex officio chairperson,
2. Deputy Governor in charge of monetary policy,
3. An officer of the Bank to be nominated by the Central Board,
4. Three persons to be appointed by the central government.
● This category of appointments must be from “persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy”.
Way Forward
- The government should restrict the export of fuel and other Petro-products. This will force refineries to sell their output in the domestic market, removing one reason for giving them assured trade-parity prices.
- Diversifying its source of oil and gas imports, creating strategic oil reserves, blending ethanol with auto fuel and an ambitious electric mobility plan.
- Taking less dividends from oil Public sector undertakings.
- Deciding a Revenue Neutral Rate – A revenue neutral rate is one which does not lead to a fall in tax revenues. It is also to be ensured that the rates are not fixed too high as to lead to inflation. In the report by Arvind Subhramaniam, he has suggested creating 3 bands with a RNR OF 16%.
QUESTION FOR PRACTICE
The price of petrol and diesel in India is determined by internal and external factors. Discuss the fuel pricing mechanism in India along with constraints faced by states in lowering fuel prices. (200 WORDS, 10 MARKS)
