Can lower tax charges alleviate high fuel prices?
What has ICRA proposed and will it cool inflation to the comfort level prescribed by the RBI?
The story so far: The rating agency ICRA recently hypothesized that the government has the option of reducing levies on retail gasoline and diesel prices, thereby lowering prices. Lower fuel prices will likely help cool inflation levels, which are currently above the 6% upper limit specified by the Reserve Bank of India (RBI).
Why did the ICRA say that it was possible to reduce the levies on property taxes?
ICRA anticipates an increase in population mobility and an economic recovery after the loosening of borders and the acceleration of the pace of vaccinations against COVID-19. It forecasts that gasoline and diesel consumption would therefore increase by around 14% and 10%, respectively, in the 2021-22 fiscal year (compared to the low base of a 2020-2021 national lockdown).
The agency predicts that the total revenue from these taxes on these two fuels will increase by about 13% in FY22 compared to the previous year, assuming the total of gasoline and diesel cuts. unbranded remains unchanged at 32.9 / liter and 31.8 / liter, respectively. That is, the government’s forecast revenue from taxes imposed on these two fuels is 3.6 lakh crore for this fiscal year, or about 40,000 crore more than in the last fiscal year.
The ICRA argues that if the government decides to forgo the additional revenue that could result from higher fuel consumption, it could reduce up to 4.50 yen per liter for gasoline and diesel each.
How much tax do we pay on a liter of gasoline?
In June of this year, taxes accounted for nearly 58% of the price of gasoline in Delhi. Between May 2014 and June 2021, the Centre’s share of taxes on the retail price of gasoline increased by 216%, even as the base price of fuel fell by 24%. According to an analysis of The Hindu, if one had bought a liter in New Delhi for 94.49 yen on June 1, 2021 (according to the latest data available from the government’s Petroleum Planning and Analysis unit), 32.90 yen would have been paid to the Center as tax. Compare this with the Center tax of 10.39 yen when the total fuel price was 71.41 yen per liter in May 2014.
In its June analysis, ICRA pointed out that current fuel prices reflect higher taxes imposed by the Center since March 2020 and an increase in value added tax (VAT) rates by more than three-quarters of governments. States.
Its estimates showed that on average, gasoline and diesel prices reached 98 yen / liter and 90.7 yen / liter, respectively, in June 2021, compared to 75.5 yen / liter and 68.4 yen / liter. , respectively, in April 2019, despite the US dollar price of the basket of Indian crude oil being at similar levels (around $ 72 on average in June in terms of the Indian basket) at these two points in time.
Would a reduction in fuel shutdowns affect the government’s ability to pay interest and principal on oil bonds issued to state-owned petroleum marketing companies (OMCs) in compensation for subsidies?
The agency estimated that the Center needs 20,000 crore in the current fiscal year to serve interest and principal on special oil bonds issued to oil marketing companies (OMCs) during the period 2005. -2010. If this debt service obligation is to be offset by additional revenue from fuel cessations, the potential reduction in tariffs could be in the order of 2 yen per liter for both fuels, he said. he declares. The government had served nearly 10,000 crore interest on oil bonds in each of fiscal years FY20 and FY21, according to a recent report Activity area report. The last principal payment was made in March 2015 for an amount of 3,500 crore. The current total outstanding is around 1.30 lakh crore, of which 10,000 crore in principal and an amount equal to interest is payable this year, according to the report, citing official data. These bonds bear interest, have a fixed interest rate and are paid semi-annually. Annual interest owed of approximately 10,000 crore has been budgeted.
How can falling fuel prices make it easier for the RBI to balance economic growth and inflation?
Retail price inflation based on the Consumer Price Index (CPI) has been consistently above the RBI’s medium-term target of 4%, which however allows a range of 2-6% . For May 2021, interim inflation was 6.3%, due to persistent pricing pressures in the transportation and communications category, which includes gasoline and diesel automotive fuels and weighs 8.59% in the CPI . The transport and communications category saw its price increases accelerate to 12.38% in May, from 11.04% in April.
While the RBI has tried to maintain a pro-growth stance by maintaining an accommodative monetary stance that includes keeping benchmark interest rates significantly low and unchanged in response to the pandemic, its Monetary Policy Committee (MPC) has repeatedly warned of the upside risks to the inflation path from “international commodity prices, especially crude, as well as logistics costs”. The MPC’s prescription to resolve this issue reads: “Excise duties, taxes and levies imposed by the Center and the States must be adjusted in a coordinated fashion to contain the input cost pressures emanating from the prices. gasoline and diesel. “
Lower pump prices for transportation fuels would ease some pressure on retail price inflation and thus allow the RBI a little more leeway to continue to keep the cost of borrowing lower. . This, in turn, could facilitate increased demand for credit both to consume and to invest in new business activities, spurring growth.
(With contributions from Vignesh Radhakrishnan)