On Thursday UPA government slashed the petrol and diesel prices by Rs. 2 and Re. 1 respectively. This is the second price cut in less than three months and people are jubilant over this and rightly so.

However the bone of contention for me is the fact that government says it is doing all it can to curb the rising inflation and at the same time analysts and oil companies are crying foul for the fact that oil companies will be loosing money due to this price cut. However in a country like United States of America; where petrol companies operate freely and raise prices on their will, petrol prices are almost half of what they are in India! Yet the companies are making profits and its not like government is reeling under the pressure of subsidy.

Then what is the reason behind the high prices of petrol in India and despite those high rates why is industry loosing money?

TAXES: That’s right, high taxes are the reason why petrol in India costs almost twice as much as it costs in New York. It’s not like there is one single high tax that we as consumers have to pay, there are several taxes which are levied on the petrol from the moment it lands on our shore. This is the sole reason why you and I have to pay more despite the fact that we earn less than what a New Yorker earns.

Don’t believe me? See what Federation of Indian Chambers of Commerce and Industry has to say regarding this:

“Will not it be like a dream come true, if a litre of petrol costs Rs. 30-35. Yes, definitely it would be. But sad enough there is hardly any chance for such a dream to come true. Not for the fact that the petrol resources are depleting sharply, not even for the reason that international conflicts would never end. It is actually due to the fact that state governments in India are not ready to remove sales tax from petrol and related products.

In a recently made appeal to the Uttar Pradesh Government, Murli Deora, Minister for Petroleum and Natural Gas, has asked for the state’s Chief Minister’s immediate intervention for reduction of sales tax on petrol and diesel in the state.

He was forced to do so when the petrol dealers in the state went on a strike against the huge difference between the rates of sales tax on diesel in UP vis a vis the rates prevailing in the neighboring states.

The state is among those states which charge the highest rates of sales tax on petrol. While sales tax on petrol in Delhi is 20 percent and on diesel 12.5 percent, the corresponding figures in UP are at 25 percent and 20 percent respectively. In addition, the state government is levying development charge of one percent.

The difference in sale tax has led to the price disparity of over Rs 3.50 per litre in petrol and diesel. Other examples of a difference of Rs five in prices of petrol between Goa and Mumbai show the complexity of the whole situation. Astonishingly, this difference is present even after VAT (Value Added tax) is applicable on petrol and diesel.

Unfortunately and obviously the victim of this kind of attitude by the government is the consumer. They are charged unnecessarily high by the state administrators.

While the whole industry is said to be run on basis of market dynamics, the consumer neither gets full benefits of an administered price mechanism (through subsidies) on petrol and diesel, nor does he get an impartial market mechanism to his rescue.

Arun Saxena, President, International Consumer Rights Protection Council, criticizes such price mechanism and comments, “while India is one, why does one need to have different rates prevalent within one country. VAT is there to remove such differences but then where is the result.”

In a memorandum to the Ministry of Finance and the Empowered Committee of State Finance Ministers on VAT, FICCI has stated that CST (Central Sales tax) and State Sales taxes, on petrol and natural gas should be abolished at the earliest. Industry feels that continuation of CST is acting like a multiple tax.

With a view to bring down prices of petrol and petroleum products, the Chamber has suggested that the sales tax rates, which vary from 20 percent to 32 percent, should be reduced and rationalized.

FICCI has suggested that these products be covered under VAT regime with the maximum rate not exceeding 12.5 percent to enable prices of these products in India comparable with those in other countries.

With such structure in line petrol and diesel would be charged just like any other product on the basis of MRP. Arun Saxena advises “Use one structure and charge the consumers on the basis of MRP, which would be similar all over India.” If done, this could take the consumers closer to their dream of cheaper fuel, even if does not fulfill it completely.”

Source: FICCI

The above stated facts by FICCI are absolutely correct, now if the government is really interested in bring down the prices of petrol and diesel to curb the inflation, then why doesn’t it acts on the recommendations of FICCI?

After all a reduction of 7.5% or more in sales tax would have a deeper impact than a reduction of couple of Rupees taken away from the oil companies and at the same time it would leave oil companies with profit which could be reinvested into oil exploration, improving services and fuel quality.

I think it is about time that we start asking for answers and long term solution rather then celebrating the moves made by political parties to engage in vote bank politics at the expense of industry and our pockets.

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