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Inclusion of fuel under GST could prove beneficial

India is the world’s third largest importer of crude oil and with recovery following a V-shaped trajectory, December 2020 crude imports were 11.6% higher y-o-yPremium
India is the world’s third largest importer of crude oil and with recovery following a V-shaped trajectory, December 2020 crude imports were 11.6% higher y-o-y

The incessant fuel hike that has led to petrol and diesel prices crossing 100 per litre mark in Rajasthan and Madhya Pradesh is expected to impact the fuel consumption expenditure of the common man and his budget due to cost escalation in essential commodities. Mint explores.

The incessant fuel hike that has led to petrol and diesel prices crossing 100 per litre mark in Rajasthan and Madhya Pradesh is expected to impact the fuel consumption expenditure of the common man and his budget due to cost escalation in essential commodities. Mint explores.

What factors influence price tweaks in fuel?

The factors influencing fuel prices in India are international crude oil price, import duty, refinery cost, freight cost, central excise, state value added tax, margin of marketing companies and retail fuel outlets. Output cuts by oil producing nations across the world along with high taxes have been the cause of skyrocketing fuel prices. Recently, international oil prices have been on the rise leading to crude rising to $63 per barrel. This has come on the back of a deal between Opec+ and Saudi Arabia pledging additional voluntary output cuts of 1 million barrel in the daily production, thus reducing supply in the market.

How does India source its fuel requirements?

India is the world’s third largest importer of crude oil and with recovery following a V-shaped trajectory, December 2020 crude imports were 11.6% higher y-o-y. With India importing nearly 84% of petroleum products consumed domestically, global crude oil price changes have a bearing on its domestic price. India primarily imports crude from Iraq, Iran, Saudi Arabia, Iraq, the UAE, Nigeria, Brazil, and the US with Iraq being the top oil supplier followed by Saudi Arabia. India has strategic petroleum reserves equivalent to 85 days of imports thus providing a cushion during any supply chain disruptions.

How does the exchange rate impact landed price of oil?

While the international crude oil prices decline, petrol and diesel prices in the domestic market need not. This happens when the Indian rupee depreciates simultaneously leading to a higher outflow of foreign exchange, thus increasing the landed price of crude oil. A weaker rupee constrains the government from bringing down fuel prices.

Do both Centre, states gain from price hikes?

Petrol and diesel prices in India have always been regulated. But, now with both being deregulated and the administered price mechanism being phased out, the government plays no role in its daily price fluctuations. However, since it has been kept out of the goods and services tax (GST) net, both central and state taxes are levied. For Delhi, nearly 60% of the petrol price is because of taxes. While, the central excise duty is a specific tax, the value added tax of states is on an ad valorem basis, causing states to gain from hikes.

What’ll happen if fuel is brought under GST?

Bringing petrol and diesel within the ambit of GST will lead to a drastic fall in prices. Even if the maximum 28% rate is levied, it will be beneficial for consumers. This will reduce travel expenses and production costs, thus bringing down inflationary pressures. Profit margins of firms will also expand, causing public sector undertakings to contribute higher dividend to the Centre, while the private sector will contribute more as corporate tax.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH

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