OMCs pay 73% higher excise duty even as crude oil prices decline

The top four OMCs paid all-time high excise duty of Rs 2.87 trn in FY21, up from Rs 1.66 trn in FY20

If prices of petrol and diesel are burning a hole in your pocket, then blame it on the steep hike in excise duty on transport fuels last year.

The country’s top four oil-refining and -marketing companies paid 73 per cent higher excise duty in FY21 than they did the previous fiscal year.

Together, Indian Oil, Bharat Petroleum Corporation, Hindustan Petroleum Corporation, and Mangalore Refinery & Petrochemicals paid Rs 2.87 trillion in FY21, up from Rs 1.66 trillion in FY20.

As a result, excise duty on petroleum products accounted for a quarter of the companies’ ex-refinery prices of all petroleum products in FY21, up from 13.2 per cent a year earlier and just 4.9 per cent in FY14.

The companies’ finances suggest a five times jump in excise duty on petroleum products in the last seven years.

In contrast, diesel consumption was down 12 per cent year-on-year in FY21 due to the lockdown while the sale of petrol, or motor spirit, was lower by 6.8 per cent.

The overall consumption of petroleum products was down 9.1 per cent in FY21.

So in the absence of a tax hike on diesel and petrol there would have been a decline in government excise collection from petroleum products in FY21. Higher taxes, however, more than compensated for lower fuel consumption last fiscal year.

In FY20, diesel accounted for nearly 39 per cent of the consumption of all petroleum products in the country, followed by motor spirit (14 per cent) and liquefied petroleum gas (LPG) at 12.3 per cent.

The retail price of fuel includes other indirect taxes such as import duty and local sales tax or value-added tax, besides cess.

“All indirect taxes, cess and dealers’ commission together account for nearly 65 per cent of the retail prices of diesel and petrol,” says Madan Sabnavis, chief economist, CARE Ratings.

With this, the central government has collected excise duty of nearly Rs 11.8 trillion from these four oil-marketing companies in the last seven years, more than two and a half times what the previous government had netted from these firms in 10 years from FY04 to FY14 (see the adjoining charts).

Higher excise duty also resulted in a much lower decline in the companies’ gross revenues or ex-refinery revenues. These four companies’ combined gross sales were down just 8.8 per cent year-on-year in FY21 against a 21.2 per cent decline in their net sales (revenues net of excise duty) last fiscal year. The decline in net sales reflected the combined impact of lower sales volumes and lower crude oil prices last fiscal year. Also the companies’ raw material cost was down 26.7 per cent last fiscal year.

In the last seven years, the government’s excise duty collection from these four companies has gone up at a compound annual growth rate (CAGR) of 26.5 per cent from Rs 55,266 crore in FY14 to Rs 2.87 trillion in FY21.

In the same period, the companies’ combined net sales declined at an annualised rate of 3 per cent from Rs 10.66 trillion in FY14 to Rs 8.6 trillion last fiscal year. In the same period, the companies’ raw material cost declined at an annualised rate of 4.2 per cent.

Economists say that higher indirect taxes on fuel are now becoming regressive in nature.

“Higher taxes on universal inputs like diesel have a cascading effect on the economy, leading to higher prices for most goods and services. As a result, the poor end up spending a greater portion of their income on taxes than the rich people,” says Devendra Pant, chief economist and head public finance, India Ratings.

This also has a bearing on inflation.

“High fuel price is one of the key contributors to a steady rise in the wholesale price index, which has now breached the double-digit mark. This will translate into higher production cost for manufacturers,” Madan said.