Petrol, diesel at record high: States must rise to the occasion to rein in shooting fuel prices

It is the states that have been making a killing on the back of the relentless hike in petroleum products prices in recent times. The Centre can at best make peripheral changes in the custom duty of 10.25 percent crude imports which accounts for nearly 80 percent of the oil refined in India. The excise duty rate is specific as opposed to ad valorem rate of customs and state VAT (value added tax). At Rs 19.48 per liter on petrol and Rs 15.33 per liter on diesel, excise duty has remained static since October 2017.

Specific duty begets constant revenue for the exchequer being impervious to upward or downward movement in prices. Ad Valorem (according to value) on the other hand is potentially inflationary as is happening now in the context of petroleum products, with VAT moving up sharply in sync with the spike in international oil prices and the retail prices in the Indian petrol bunks.

As this report in Financial Express points out, the Delhi government hit pay dirt on Monday (21 May 2018) with a single day additional VAT collection on petroleum products of Rs 1.2 crore. Maharashtra and West Bengal intuitively must have made several times this bonanza given the usurious rates of VAT they impose on petroleum products treating them as they do as milch cows.

Petroleum Minister Dharmendra Pradhan has been saying all along that if petroleum products were brought under the GST regime, the price to the consumer would halve. This may be a trifle optimistic given the fact that GST rates are revenue neutral to start with. But the central government can possibly undertake to reimburse the loss of revenue for five years as it has done for other products brought under the ambit of GST to the extent they have fallen short of revenue neutrality.

It is, therefore, the states that are more to blame for persisting with the steep rates of VAT on petroleum products and simultaneously putting roadblocks on bringing them under the GST regime. The four BJP-ruled states — Maharashtra, Gujarat, Madhya Pradesh and Himachal Pradesh — reduced VAT rates following the October excise cut by the Centre but the recent spike in international crude prices and the resultant weakening of the Indian rupee have ensured that even their revenues were not only quickly restored but went up.

The BJP is in power in 21 states. It can exhort its state governments to sharply reduce the VAT rates on petroleum products if only to neutralise the impact of the rampaging prices in such a way that its revenue collections remain where they were before the international crude prices started climbing. Whether that shames the Opposition into doing the same is a million dollar question especially when they are have their daggers drawn with the BJP after the recent Karnataka results.

But Opposition states lying cheek by jowl with the BJP-ruled states may have to fall in line willy-nilly. To wit, Punjab may have no option but to bring down the VAT rates to the levels imposed in the neighboring Himachal Pradesh and Haryana given the fact that otherwise trucks and other vehicles would see merit in filling up their tanks not in Punjab.

The government can also think in terms of issuing petroleum bonds a la inflation indexed bonds. Its contours can be like this: Bond face value Rs 10,000. Maturity ten years. Open only to individuals. Simple interest 5 percent per annum. Investment tax deductible under section 80C. Redeemable across the counter in specified government banks any time with the redemption value being face value as increased or decreased by the change in the basket of the petrol bunk prices of petroleum products from the date of issue.

To be sure, it may at best be a palliative if not a cruel joke on the common man reeling under the impact of inflation. But if electoral bonds could be tried despite failure written all over them, there is no harm in trying out petroleum bonds.

(The writer is a senior columnist and tweets @smurlidharan)