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India is one of the largest importers of Crude Oil as it imports roughly around 80% of its total requirements. The recent fall of almost 45% in the crude prices from at its peak of $115/Barrel in June 2014 to $57/Barrel in January 15 has been a blessing in disguise for the Indian economy. The petroleum subsidy was projected at around 64000 crores for the FY15.

The falling prices has a positive effect on the Indian economy as the government de-regulated the prices of diesel in October 2014 and the same are now market linked. The price of petrol was already de-regulated earlier. Which will help the government in reducing its subsidy on petroleum products. The Oil Marketing Companies (OMC) now fix the prices of Petrol and Diesel fortnightly and that of LPG and Aviation Turbine Fuel monthly.

But in the past three months we have seen that the benefit of the decrease in the price of Crude oil is not transferred entirely to the consumers as the government has cumulatively increased the Excise duty on Petrol by Rs. 5.75/- per liter and on diesel by Rs 4.50/- per liter in three instances. Is the government justified in increasing the excise duty on these products and depriving the common people of lowering crude prices?

The present price of petrol in Delhi is Rs. 61.33 a litre and that of diesel is Rs. 50.51 a litre (the rate will be a little higher because of the levy of VAT). Had the excise duty not been increased the price would have been 55.58/- a liter and that of Diesel being Rs. 46.01 a liter excluding the levy of VAT.

On a broader point we have to look at the fiscal deficit, which was estimated at around 4.1% of the GDP and the projected growth rate of around 5.5%. but in a recent publication we have seen that the 99% of the fiscal deficit target has already been reached by the end of November 2014, with still 4 months left in the current fiscal.

The government has made an ambitious target of collection of collection of 6.23 lakh crore in Indirect taxes for the FY15, which is 25% more than the collection for the FY14, but has been able to collect just 3.30 lakh crore
which is just around 53% of the budgeted target with just four months left, the additional excise duty on Petrol and diesel will help the government of additional mobilization of taxes of around 16000 crores in the current fiscal, which will help in reducing the deficit.

The wholesale price inflation being recorded at ZERO percent in November 2014, down from 1.77 percent in October 2014. It is the lowest rate in nearly 5-1/2 years, it further proves that increasing the excise duty on Petrol and diesel is not impacting the common people as the prices of commodities are decreasing.

Moreover, the crude prices will not be at this level forever, as this is impacting the economic target and condition of OPEC, as of now, they have decided not to reduce their production but in future they will be bound to decrease it due to increasing production of shale gas in USA and slower growth in China.

As the vast majority of people of India living in rural places, they don’t have much of an idea of all these excise duty and falling crude prices and exchange rate, rather they are more concerned with the prices which they are paying now. But if all the reduction is passed on to the people now, they might be very happy now, but in future, when the crude prices will increase and they have to pay more, then there will be widespread criticism for it.

The government in near future may reduce the excise duty on petrol and diesel and the net impact of increase in the prices will be less than the actual. So it is a win-win situation for the government as it is mobilizing extra revenue as of now, and in future the increase in prices of petrol and diesel will be less. It will also safeguard the common people from extreme volatility in the prices. As of now, by increasing the excise duty the common people are not so much affected as the prices of petrol and diesel are still decreasing.


Published by

CA Ashutosh Khaitan
Category Others   Report

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