With four states and one Union Territory going to polls from month end, there is speculation that the government may rein in fuel prices to provide respite to consumers. Government sources said consultations were on between the Centre and states to cut taxes on petrol and diesel.
Skyrocketing fuel prices have been one of the key poll planks used by Opposition parties in the poll-bound states to corner the BJP.
Public sector fuel retailers also seem to be going easy on prices, even though Brent crude topped $70 per barrel. Pump prices have remained unchanged for nine days.
Fuel prices have been increasing steadily over the past few months, breaking the psychological barrier of Rs 100/litre in states like Rajasthan and Madhya Pradesh. Diesel is selling at Rs 80/litre across the country, raising transportation costs.
The fuel math
Taxes on petrol and diesel are an important revenue source for both the Centre and state governments. Following the Covid-19 pandemic and subsequent lockdown, generating revenue has become pertinent for states.
The total revenue generated through taxes on fuel for both the Centre and states stands at Rs 5.5 lakh crore annually.
If fuel is brought under GST, then both Centre and states will suffer losses to the tune of Rs 2.5 lakh crore annually as the highest tax slab under the tax regime is 28 per cent.
The question is – Who will bear the loss?
Finance Minister Nirmala Sitharaman said she understood the need of consumers of the country “but there is a ‘condition of direness’ in front of the government”.
“Whatever tax the government collects, 41 per cent of it goes to the states. It’s not just about the cess. You have the excise duty of the Centre. Then, you have the VAT of the states,” she said.
She said the way to find a solution to this problem is for the Centre and the states to hold a dialogue.
The Covid-19 impact
With the world under lockdown, the price of international benchmark Brent crude had hit a historic low of $19 a barrel in April 2020.
In order to push the crude prices up amid lower demand, the Organisation of Petroleum Exporting Countries (OPEC) had cut oil production by 9.7 million barrels per day in May 2020.
Saudi Arabia too decided to cut the output by 1 million barrels per day through February and March this year in order to boost demand. This led to an increase in prices, with crude selling at $65.09 a barrel on February 18.
Why has there been a spike in oil prices?
Ras Tanura, the world’s largest crude oil exporting facility in Saudi Arabia, was attacked by a drone, with a missile landing close to a residential complex near the storage facility.
The attack was made by Houthi rebels and though it did not impact oil supplies, the price of Brent crude, which has already been on an upswing since October, rose further to $70.7 per barrel. The rise in prices came on the back of concerns about the security of the country’s crude oil supplies.
In written replies to a spate of questions on rising fuel prices in the Lok Sabha, Oil Minister Dharmendra Pradhan said, “Prices of petrol and diesel have been made market determined by the government with effect from June 26, 2010 and October 19, 2014 respectively.”
“Since then, the public sector oil marketing companies (OMCs) take appropriate decision on pricing of petrol and diesel in line with their international product prices, exchange rate, tax structure, inland freight and other cost elements,” he said.
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