Petroleum prices

The News

Union Finance Minister said the entire duty reduction in petrol and diesel announced had been done out of the road and infrastructure cess (RIC) component of the taxes levied on petroleum products, and the entire burden of the tax cuts was hence being borne by the Centre.

According to the FM the basic excise duty on petroleum products, which is shared with the States, had not been touched.

The total taxes levied on petrol and diesel include a basic excise duty, a special additional excise duty, the road and infrastructure cess and the agriculture and infrastructure development cess, of which only the basic duty is shared with the States.

Ms. Sitharaman said the duty cuts announced in November 2021, of ₹5 a litre of petrol and ₹10 a litre of diesel, were also made entirely in the road and infrastructure cess component of petroleum taxes.

The total revenue implication to the Centre, on these two duty cuts, is ₹2,20,000 crore a year, the finance minister noted, before emphasising that spending on development and subsidies has accelerated under the Modi government.

Petroleum Pricing Mechanism in India

Previously, the government was the sole regulator of petrol prices. In 15 days, it was revised once. The government deregulated petrol and diesel prices in 2014.

Oil Marketing Companies (OMCs) like Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd, and Hindustan Petroleum Corporation make this decision based on a number of factors, overseen by the PPAC (Petroleum Planning and Analysis Cell) under the Ministry of Petroleum and Natural Gas.

From mid-June 2017, the pricing of petrol and diesel is done through a ‘daily pricing’ mechanism, based on a 15-day rolling average international rate. Thus, fuel prices are revised every day at 6:00 AM

The price of petrol and diesel in India is not based on the actual costs PSU refiners Indian Oil, HPCL, and BPCL incur for crude oil sourcing, refining, and marketing.

Rather, a formula — trade parity price (TPP) — is used to price these products.

It assumes that 80 per cent of petrol and diesel is imported into India and 20 per cent is exported. So, petrol and diesel prices in India are determined based on prices of these fuels in the international market — and not on the basis of crude oil prices.

Factors affecting Fuel prices in India
  1. Crude Oil Cost: It is unrefined oil, the price of which fluctuates with demand and supply imbalance, foreign relations and future reserves and supplies
  2. Increased Demand: With an increase in vehicle-owning population, demand increases which affects its price
  3. Taxes: Prices change as per the changes in government policies imposing tax on fuels – there are two major tax levied on petrol. This is the excise duty and the value added tax (VAT)
  4. Rupee and Dollar: When dollar strengthens against Indian rupee, buying cost of OMCs increase, and hence the price of petrol
Computation of Prices

Retail price of petrol = Price at which the petrol dealers/distributors buy from OMCs + Excise duty (which is charged by the Centre) + Dealer's Commission + VAT (which is levied by the state government)

Taxes on Fuel Prices
  1. Excise Duty: Charged by centre
  2. VAT: Levied by state governments (Not uniform depends on states)

     Fuel prices in the country does not come under the Goods and Services Tax (GST)

Criticism of Trade parity Price mechanism

India imports most of its oil needs but is more than self-sufficient in petrol and diesel production. So, the trade parity pricing mechanism has often been criticised, especially since petrol and diesel are ‘decontrolled’ fuels.

The complaints include allegations of cartelisation with the three PSU oil companies charging nearly the same price, despite different cost structures and efficiencies.

Transparent pricing, based on market principles, will likely help consumers more.

Practice Question
Critically examine the pretorleum pricing mechanism in India. What Measures will be required to bring Uniformity in prices of petroleum products across the country?(250 words/ 15 Marks)
Posted by on 23rd May 2022