Fuel price assessment and it’s impact

Written by Syed Muheeb

It seems just a year ago when the fuel prices were as low as 89 Rps per litre and there was an
outcry as to how high the fuel price is given that the global oil importers were facing negative
crude oil prices.

In spite of the lockdowns and halt in production from the OPEC and gulf nations, it has very
little influence over the fuel prices in India. As of today the fuel prices stands Rs 107.63 in
Delhi, Rs 114.23 in Mumbai and Rs 111.43 in Bangalore an unprecedented all-time high. This
has of course made huge impact on daily wage labourers and service industry who rely
heavily on these fuel prices.

Now the question that has been put forth is

1. What are the contributing factors to rise in fuel price?
2. Will the cost come down heavily in near future by bringing the fuel under the ambit
of GST?
3. Whether the increase in price is a move to push consumers to adopt electric vehicles?

To answer our primary concern,

What are the contributing factors to rise in fuel price?

Fuel prices such as Petrol, Diesel etc is influenced by a lot of variables to quote a source from
Lok Sabha.
"In 2010, the prices of petrol were determined by the government and were revised every
fortnight. In 2014 the price of diesel was also deregulated and since 2017 prices are being
revised on a daily basis. Since then, the public sector Oil Marketing Companies make
decisions on the pricing of petrol and diesel based on international product prices, exchange
rate, tax structure, inland freight and other cost element"

Which is why just in the span of May 2021 to October 2021 Fuel prices have been surged over
whopping 27 times.
The central government maintains a defensive stance saying it is necessary for providing the
welfare schemes, while also maintaining that state governments do not want to bring it under
the ambit of GST will bring about a uniform tax rate as it is one of the factors that influence
the fuel prices.

Essentially there are 4 factors contributing to the rise in fuel levels.

1. VAT Charged by the state governments from their end.

2. Excise Duty charged by the central government for importing
3. The importing cost of crude oil, freight and processing charges incurred by the dealer
4. the dealers commission to provide it for a gas station

This leads us to our next question.

Will the prices come down heavily in near future by bringing the
petroleum products under the ambit of GST?

The answer to this question is shrouded with ambiguity with tough stances maintained by
both centre and state governments respectively.
With wide acceptance that the fuel prices has impacted several service industry workers and
daily consumers of the commodity. There is little effort from both sides to circumvent the
issue.

The fuel prices is influenced by international prices indeed but that's just one of the factors
when taken in isolation.
The main driving force behind such an increase is the hike in central and state government
taxes.

Union minister of petroleum and natural gas and steel Dharmendra pradhan has said that the
prices can't be brought down as government is saving money to spend on their welfare
schemes.
The latest one being 'Pradhan Mantri garib kalyan yogna' which aims to provide food grain
to poor for over 8 months. For which the Union government has set aside Rs 1 Lakh Crore.

"I accept that current fuel prices are problematic for people but be it central/state government,
over Rs 35,000 crore have been spent on vaccines in a year,” said Pradhan quoting to media
persons. “In such dire times, we are saving money to spend on welfare schemes.”

India’s fiscal deficit was at 9.3% of GDP for 2020-’21, which was the highest fiscal deficit on
record. But, as Pardhan said, levies on fuel is helping the Centre afford the current welfare
expenditure.

In fact, the base price of petrol has only reduced – from Rs 47.12 in May 2014 to Rs 37.29 in
June 2021 and central taxes increased from Rs 10.39 in May 2014 to Rs 32.9 in June 2021,
according to data from Petroleum Planning and Analysis Cell.
According to data from the Controller General of Accounts, excise duty collection during
April 2020-November 2020 was at Rs 1,96,342 crore, up from the Rs 1,32,899 crore during the
same period in 2019.

"By not reducing taxes the government is able to earn higher revenue and we have seen last
year that the excise collections were much higher than what was targeted,” Madan Sabnavis,
chief economist at CARE Ratings Ltd, a credit analysis and research company, told

The state governments are against the inclusion of fuel under GST as they earn huge chunk of
taxes from the collection of VAT

Both Centre and states collectively collect over Rs 5 lakh crore tax on petroleum products
annually. It would not be easy to bring petrol and diesel under GST regime as states would
collectively suffer an annual revenue loss of Rs 2 lakh crore, The speculation about GST on
petroleum products has already received opposition from certain states.

Maharashtra deputy chief minister Ajit Pawar said the state government was against any
move to encroach upon the it's rights to levy taxes and would put forth its view in the GST
Council meeting.

"We are yet to get Rs 30,000 crore to 32,000 crore of our share of the GST refund. Apart from
Excise and stamp duty, the largest pool of revenue for the state government is from the GST,”
he said.

Similar concerns have been raised by Kerala finance minister K N Balagopal who said that the
state will strongly oppose, if there is any move to bring petrol and diesel under the GST
regime.
According to him, if petrol and diesel are brought under the GST regime, the state will lose
Rs 8,000 crore annually.
BJP-ruled Karnataka has also decided to oppose the proposal as its average monthly revenue
is expected to decrease from the present Rs 1,500 crore to Rs 600 crore if the GST switch
happens.

What will happen if the fuel is indeed brought within GST?

If the GST council indeed decides to cover fuel prices under its regime, then there will most
likely be a maximum tax of 28 per cent on the base price of petrol, diesel across all states. This
means the different rates of excise and VAT that the Centre and states used to levy on the fuel
prices will be replaced with a uniform GST rate across the country.

At present in Delhi, the base price of petrol is Rs 40.78 and including the freight charges, the
amount for dealers comes out to be Rs 41.10. This is our base price for petrol in Delhi, as per
Indian Oil website.
To this we add excise duty of Rs 32.90, dealer commission Rs 3.84 and VAT on dealer
commission Rs 23.35. Calculating the total we get the retail selling price of petrol in Delhi
which is Rs 101.19.
Now, if prices start being regulated under the GST regime, this excise duty (which is the
Centre's share) and VAT (state's share) will be done away with and 28 per cent GST will be
levied on the base price which comes out to be Rs 11.50. To this we will add the dealer's
commission of Rs 3.84 and our retail price of petrol comes down to Rs 56.44.

This is huge drop from the current rates and could also paint the picture as to why both centre
and state are reluctant bring any changes in the current set up of fuel tax rates. But is just taxes
that both central and state government are earning or is it part of a bigger picture to adopt
electric vehicles and maintain the SDG 2030 targets.

This brings us to our final question,

Whether the increase in price is a move to push consumers to adopt
electric vehicles?

In 2015, the government launched the Faster Adoption and Manufacturing of (Hybrid &)
Electric Vehicles in India (FAME India) scheme to implement the goals of the National Electric
Mobility Mission Plan, 2020. Phase one of the FAME India scheme had four focus areas. Two
of these focus areas were demand creation and charging infrastructure. The government had
also taken a few initiatives to promote e-mobility by lowering Goods and Services Tax (GST)
on battery-operated vehicles and exempting permits. However, the government was
unsuccessful in achieving its target of selling seven million EVs by 2020. The demand for EVs
in India is still stagnant.

With phase 2 currently in focus there seems no respite for Government with consumers
reluctant to buy high prices electric vehicles. But with the unprecedented fuel prices impacting
millions of Indian consumers who are looking for cheaper alternative Electric vehicles (EVs)
are a potential low-cost alternative that may get traction in the current scenario of rising
operational costs of petrol and diesel vehicles. Powered directly by the grid, EVs are
increasingly proving to be operationally cheaper for their owners than petrol and diesel
vehicles in terms of their total cost of ownership (TCO).

The TCO for any vehicle is the sum of all the costs incurred from owning the vehicle to interest
payments, road tax payment, fuel costs, maintenance costs, and finally, the salvage value
obtained from selling the vehicle in the second-hand market. The TCO comparison of a vehicle
for various fuel types in the current market scenario highlights that the price of owning and
operating EV vehicle is lesser than its internal combustion engine (ICE) counterparts. An
individual purchasing a private car in Mumbai and travelling an average of 50 km daily, saves
₹ 2 per kilometre effectively by using an electric car over a petrol one. The saving can be as
much as ₹ 4.5 per kilometre for a cab driver operating 160 km daily.

Conclusion

To sum up the Fuel price in India is influenced by many factors but main contributing factors
of these are the Central and state government tax rates.
The increase in fuel price has crippled the spending limit of daily consumers and is set to
increase the inflation of households and to solve this government has to bring the fuel price
under the ambit of GST or push the consumers to adopt electric vehicles.
It's reasonable to say that the Fuel price under the ambit of GST isn't something that will
happen anytime soon due to tough stances maintained by many states but consumers looking
towards cheaper alternatives is gaining traction with the data and shift in public perspective
about electric vehicles, India could see an increase in adoption of electric vehicles in the
immediate future which could help the government project FAME as well.