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Govt should tax crude imports instead of raising tariffs
November, 07th 2012

The finance ministry is reportedly looking at raising customs and excise duties on sundry commodities whose tariffs are below the peak rate to shore up revenues. This is a bad idea. Such random changes would yield sub-optimal results and could distort the tax structure.

Instead, the government should simply impose a 2.5% import duty on crude and bring it on par with the duty on products. Duty-free crude only serves to beef up refining margins. Oil refiners should earn their profits from operational efficiency, not from tariff protection. Clearly, import duty on crude would lower the huge levels of effective protection that minimal value addition in refining enjoys and also generate much-needed revenue.

The price of the Indian basket of crude, which stood at around $113.64 a barrel in the first half of September, dropped to $109 per barrel by end-October and further to $106.3 per barrel on November 2. The drop in prices, though not steep, makes it easier for the government to levy import tariff without undue harassment of either the end-consumer or the oil companies.

The duty would boost revenues significantly, given that imports account for about 84% of the country's oil consumption and is the single-largest item of import. The government should also decontrol diesel prices and throw fuel retail open. Private refiners and stand-alone, independent retailers would compete with established oil marketing companies to rein in fuel prices.

And the new retail business would also compensate private refiners for thinner refining margins owing to the import duty on crude. Indirect tax collections grew at 15.6% during April-September this year against the Budget target of 27% due to the economic slowdown. The larger point is that the economy must revive for tax collections to improve.

So, the government should boost investment to revive growth. The Centre and states should also move swiftly to the proposed goods and services tax, even if the design is not perfect. Revenues will become buoyant once all production is captured under the tax net. Strengthening competition is another way to boost growth and revenue.

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