Oil companies need to be pulled back from the brink of financial ruin but what about our already delicate fiscal position?
Vikram Mehta
Chairman, Shell India
“A more optimal policy would be to reduce the central taxes and levy them on a specific rather than on an ad valorem basis and bring petroleum within the ambit of the goods and services tax”
Consider this. In 2010-11, Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation paid Rs 92,176 crore to the central government in customs duties and excise taxes plus an additional Rs 78,690 crore in sales tax or value-added tax (VAT) to state governments. Consider further. In 2010-11, these companies under-recovered (a euphemism for loss) Rs 78,190 crore because of the government fiat that they sell petrol, diesel, LPG and kerosene at prices below cost. In other words, these companies “paid out” directly and indirectly Rs 256,190 crore that year. 2010-11 was not a unique year. Every year for the past five years, these three companies have seen an erosion in their net worth.
This debate should, therefore, be reframed. It should not be about whether prices should be raised or taxes reduced. It should be about the politically feasible short-term step required to pull the companies back from the brink of financial collapse. Herb Stein once said, “Things that can’t go on forever must end.” The present combination of a complex and cascading tax structure and a politically motivated pricing system will, of course, end. But it is not clear whether this will happen because of the bankruptcy of the three “maharatnas”, or because the government has seen the light and implemented market-related pricing, tax rationalisation or policies involving a combination of both.
Time is running out for these companies. Their balance sheets cannot withstand the haemorrhage for much longer. The central government is facing a conundrum. It knows that if it does nothing, these companies will go over the edge. But if it takes the economically sensible route and raises oil prices and/or cuts customs and excise taxes, it might invite a voter backlash. Good economics and good politics do not make for easy bedfellows. For long, the government has ducked the issue and done nothing but now it has to face reality. It is against this backdrop of urgency that the tax structure and tax rates need to be pushed higher on the review agenda. Fiscal politics is less volatile and the suggestion has arithmetic logic.
Over the past five years, the government has collected Rs 348,987 crore in customs and excise duties. Over the same period, companies have under-recovered an almost equivalent amount (Rs 354,043 crore). This loss has then been partly compensated by the finance ministry, the Oil and Natural Gas Corporation and GAIL. In short, the government has taken with one hand and given back with the other. It has seen no net gain but it has suffered the costs of the consequential distortion of the market, the cash crunch and anti-competitiveness.
A more optimal policy would be to reduce the central taxes and levy them on specific rather than on an ad valorem basis and bring petroleum within the ambit of the goods and services tax (GST). Such a policy would reduce the base of the sales tax or VAT and thereby give oil companies the double benefit of reduced central and state taxes, bring predictability to the companies’ tax liability and simplify the current complex and cumbersome tax structure. Sales tax rates, for instance, currently vary from 15 per cent to 33 per cent for petrol and nine per cent to 25 per cent for diesel across states. GST would streamline this to one rate.
The ultimate objective must be to strike a balance between the interests of the government for maximal revenues, the consumers for affordable prices and the companies for reasonable returns and a level playing field. This balance cannot be struck by merely focusing on the instrument of tax. The alignment of prices to the market has to be a key part of the recipe.
Shashanka Bhide
Senior Research Counsellor, National Council of Applied Economic Research
“It is interesting that we wake up to the tax rate on petroleum when there is a price shock. Any tax cut should be viewed in the context of its impact on the fiscal position”
It would not be anybody’s case that petrol is cheap in India. Nor can one say petrol is used by the rich alone. The petroleum sector represents a heady mix of opportunities and choices with great consequences on our lives, public finances and the environment. Taxes are only a part of the challenges facing consumers, enterprises and the government in dealing with this sector that drives our transportation machines and agricultural pumpsets. The petroleum sector is a significant contributor to the tax revenue of the Centre and state governments. The potential of the sector as an efficient tax collector was recognised long back, in pre-liberalisation days. Since all production takes place in the organised sector, tax collection became easy.
Levying higher taxes was also justified on grounds of encouraging energy conservation and the need for incentives to go for alternative sources of energy. Now, the consumer pays a hefty tax when she buys petrol, diesel or gas. Estimates attribute 50 per cent of the price of petroleum fuels to various taxes whether it is excise, customs or value-added tax (VAT) or sales. Indian consumer pays more for petrol compared to many other developing and developed countries. Both the Centre and states levy taxes on the petroleum sector. But increasingly, the sector has attracted attention not only for its taxes but also subsidies, reflecting the tangle of taxes and subsidies in which we are caught up in terms of collecting revenues, subsidising consumers and encouraging investment in the sector. Even the proposed goods and services tax leaves the petroleum sector out of its ambit.
When international crude prices rise, domestic consumers are partially insulated from the price shock in the short term, through subsidies and essentially taxes on upstream companies. The government also effectively borrows to meet the under-recoveries of oil marketing companies so that the consumer does not have to pay a higher price. If the question is only one: from which pocket do we pay the higher price – through borrowing, taxing upstream companies or through general fiscal resources – it probably would not have mattered. But would this be the best use of available resources? Should upstream companies use their resources for new investments to find fuel for the future? Which expenditures would the government have to reduce to meet the additional subsidy bill? Should cheaper diesel benefit the use of luxury automobiles? There are many questions that the taxes and subsidies in the petroleum sector raise when there is a global price shock. Of course, the exchange rate shock may have an added effect.
Clearly, this issue is embedded in a larger question that has an impact on an already delicate fiscal position. The question of reducing taxes on petroleum products cannot be addressed in isolation from the other factors that we have noted. It is also interesting that we wake up to the tax rate on petroleum when there is a price shock through higher crude oil prices. In other words, some sort of equilibrium is accepted before the new round of increase in prices. Any tax cut in the sector should be viewed in the context of its impact on the fiscal position: how will the government meet the revenue shortfall? Obviously, it cannot touch subsidies in the sector at the same time it reduces the taxes. This will not help the consumer. It may need to cut some other expenditure or run higher deficits. Without a more comprehensive approach to addressing at least the fiscal implications, merely cutting taxes on petrol would not lead to any real benefits.
These views are personal
