What the government taketh, the Budget giveth back a little bit. In a move to compensate petroleum companies for mounting losses from its recent decision to cut consumer prices, the government pruned indirect tax levies on petrol and diesel.
The Budget reduced the ad valorem component of excise duty on petrol and diesel by a quarter to 6% and reduced Central Sales Tax by 1%.
Though international oil prices saw a runaway surge in the last couple of years, the government has chosen to only partially pass through the price rise to consumers. The deficit has been absorbed by the oil companies. Now, the tax cuts would reduce this burden on the oil companies by Rs2,500 crore per annum. In the case of petrol, the oil marketing companies will actually be making a profit of 50 paisa per litre. The government had recently slashed fuel prices by between 3.2% (Re1 for diesel) and 4.4% (Rs2 for petrol). With this duty reduction, the financial rejig to maintain the retail-selling prices has been completed.
Following the price reduction early this month, the under-recovery on diesel which was Rs2.30 per litre, will now come down to Rs1.80 per litre due to the excise duty reduction. The profit on petrol, which had been neutralised after the recent price cut would, after the reductions in excise, be around 50 paise per litre.
However the duty cut will not further translate into any further price cuts for petrol and diesel. Petroleum ministry officials said that the recent price reduction was done on the premise that the government will share part of the cut by way of duty cut which has been now announced in the budget.
Indian Oil Corporation, the country’s leading oil marketing company, welcomed the move. “It will help in reducing our underecoveries by Rs1,250 crore per annum,” S.V. Narasimhan, director, finance, IOC said.
Ajay Arora, partner, Ernst & Young, said the excise duty cut is “a good and welcome move. Hopefully it will not be followed by a price cut which negates the benefits that the oil marketing companies will get after the present cut.”
The overall under-recovery on sale of four petroleum products—petrol, diesel, LPG and kerosene—to the state-owned oil marketing companies (OMCs) at Rs73,500 crore for the full year was estimated at the then prevailing international crude prices in June 2006. This was to be partly covered through oil bonds worth Rs28,300 crore.
However, with the softening of the crude prices, the under-recovery is now expected to not to exceed Rs50,000 crore. The government is confident of meeting the earlier price cut impact through this duty reduction and oil bonds.