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Excise rejig in pipeline to cool oil
November, 13th 2007

The government is considering an excise duty rejig to minimise the impact of soaring crude oil pirces on both consumers and oil companies. At present, the excise duty on petrol and diesel has two components: a 6% ad valorem duty that varies with the basic price and another duty specified per litre.

The oil ministry has proposed that the ad valorem duty be replaced by a larger specific duty. It has also proposed that the new specific duty rate should be lower than the combined duty by Rs 2 per litre. Currently, the excise duty is 6% plus Rs 13 per litre for petrol and 6% plus 3.25 per litre for diesel. This is inclusive of the road cess but excludes the 3% education cess.

Sources said the petroleum ministry has been pressing for an excise duty restructuring to provide immediate relief to public sector oil marketing companies (OMCs) that are losing over Rs 240 crore everyday on the sale of petroleum products. The ministry has argued that the move could also provide a cushion against international crude oil price volatility.

Global crude prices are nearing $100 per barrel. On Wednesday, oil had touched a record $98.62 per barrel-mark in the US. The Standing Committee of Parliament on petroleum has also recommended the removal of the ad valorem component of the excise duty on petroleum products.

Advocates for an excise duty rejig also cite the Rangarajan Committee report on pricing and taxation of petroleum products, which states that ...imposing ad valorem duties during a time of persistent price increase is debatable.

Not only do ad valorem levies exacerbate the burden on the consumer, but they also result in the government willy nilly benefiting through higher tax yields, making it vulnerable to the criticism of profit at the expense of consumers. There is, therefore, need for both softening and smoothing the impact on the consumers of international price variations and for the government sacrificing windfall gains in revenue.

The Centres total revenue earning in 2006-07 stood around Rs 93,800 crore from petroleum, of which over 55% (Rs 51,920 crore) was excise duty mop up.

As per an estimate, the current incidence of excise duty on petrol is about Rs 15 per litre and is Rs 5 per litre on diesel. Officials supporting the move argued that the high excise duties on fuel were inconsistent with the current scheme where the government, on the one hand, was providing compensation to oil marketing companies and on the other, levying high excise duty on petrol and diesel.

The government had earlier eliminated excise duties on both PDS kerosene and domestic LPG. Perhaps there is a case to lower taxes on petrol and diesel, an official said.

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