Petroleum: Tax incidence goes higher

Petroleum prices went up. Luckily, the TV cameras had the fireworks to show at midnight, instead of the petrol stations. The petrol prices went up by 2 percent over December 2020. The GST remained the same at 17 percent, as has been the case since the beginning of FY20. The global benchmark Arab Light crude oil prices went slightly down by 1.94 percent over previous month. The rupee gained a minuscule 0.3 percent versus the greenback. Yet, petrol and diesel went dearer.

One plausible explanation to this could be a rise in Petroleum Levy form previous month, unless product import prices are not following the crude price trend, and the refining margins are acting up which cannot entirely be ruled out. Whichever it is, the government may well bank a great deal on petroleum taxes, as the 1HFY20 revenue collection has seen it a long way off the ambitious target.

Both petrol and diesel prices have of late ranged all-time highs, and a lot of it is due to the currency depreciation. Some in the government are trying to present petroleum prices in dollar terms, which is surely not the highest-ever. Some are saying the GST in percentage terms has been higher, which is not incorrect either, but both these assertions miss the point.

Petrol and diesel are locally consumed commodities, which are essentially burnt as transport fuel and add to the living and transportation costs of goods. Equating them in dollar terms as if it is fuel used for exports to draw comparisons and fetch competitive advantage, is simply twisting the tale.

Similarly, little would the GST percentages matter, when in fact the other variable in the total tax equation, i.e. the Petroleum Levy, has consistently been on a rise. In fact, the authorities have agreed with the IMF to not bring the PL on all products under Rs15 per liter– while the upper limit goes up to Rs30 per liter.

In absolute terms, the total tax incidence on two major petroleum products in 1HFY20 (petrol and HSD) stands at Rs34 per liter, of which PL has the higher share at Rs18 per liter. This is 22 percent higher than FY19 and the highest ever in recallable memory, previous high being in FY16 at Rs31 per liter.

The slow demand is not helping the cause either. Diesel sales have struggled to pick up, and petroleum sales have barely kept pace with yesteryear. From what it appears, unless the demand picks itself up suddenly, petroleum tax incidence will continue to be on the higher side. And the government will have to cope with all the criticism (some due, other undue), as it has invited some of it on herself, while in opposition.