June 22, 2006

The Great Oil Sham: India Today

The petrol and diesel price hike has fuelled a futile blame game. Unless political parties move towards a consensus on tax reforms, their protests will be seen as hollow.
SUMMER OF DISCONTENT: Protests against oil price hike in Hyderabad
44% of central excise collected is from petro products
30% of states' sales tax is from the sale of petrol and diesel
21% of the Centre's revenue receipts are from levies, taxes & dividend from the oil sector

The party flags are fluttering, the banners are strung out, and rhetorical sloganeering rents the air followed by token arrests. Politicians and political parties of every hue and colour have found reason to fuel the summer of discontent. The reason for the theatrics: the long awaited fuel price hike of Rs 4 and Rs 2 per litre of petrol and diesel since crude oil prices have shot up from $55 per barrel when prices were last hiked to $70 a barrel. The Government added that unless prices were hiked the oil PSUs would collapse. Clearly, nobody wants to buy into the logic. From former prime minister Atal Bihari Vajpayee and former Andhra Pradesh chief minister Chandrababu Naidu to the recently-defeated Tamil Nadu chief minister J. Jayalalithaa, everyone wheeled themselves out to share the pain of the masses and protest. The Left parties had already sent a note to Prime Minister Manmohan Singh on June 5 after the increase in prices seeking an explanation. Signed by the general secretaries of the CPI(M), CPI, RSP and Forward Bloc and authored by economists, the letter alleged that the UPA had no justification in raising fuel prices. They even rebuffed a missive from the prime minister for a discussion. CPM General Secretary Prakash Karat declared dramatically, "We will take the issue to the people." In Kolkata, Thiruvanantha-puram and Delhi, the Left Front unleashed a red flag wave.

It was not just the Left and the Opposition which courted arrest for the voters' gallery. Even the ruling Congress jumped on to the bandwagon. Indicative of a growing dilemma on what constitutes good politics and right economics, the party opposed its own government's decision. It didn't matter that the dramatis personae-Finance Minister P. Chidambaram, Petroleum Minister Murli Deora and the prime minister-are all Congressmen. It wasn't as if a coalition ally took the decision. Besides, other ministers were party to what was a Cabinet decision. But party spokesperson Abhishek Manu Singhvi first called for a rollback and then said, "We have not demanded a zero price rise but some decrease is certainly possible."



PETROL: Rs 53.50 per litre
DIESEL: Rs 39.96 per litre
Sales tax: 31 per cent on petrol and 34.5 per cent on diesel
Collection: Rs 5,800 crore, which is 25 per cent of the total sales tax

"We have cut taxes. Petrol and diesel will be cheaper by 80 and 30 paise."


PETROL: Rs 52.13 per litre
DIESEL: Rs 32.21 per litre
Sales tax: 27.5 per cent on petrol and 8.8 per cent on diesel
Collection: Rs 900/1,473 crore, which is 25 per cent of sales tax

"The state can't afford to cut sales tax. It would impact development."


PETROL: Rs 50.73 per litre
DIESEL: Rs 35.69 per litre
Sales tax: 27 per cent on petrol and 20 per cent on diesel
Collection: Rs 1,000 crore, which is 40 per cent of the total sales tax

SUSHIL MODI, Deputy Chief Minister
"If the UPA cares for the public, it must force states to cut sales tax to our level."


PETROL: Rs 46.84 per litre
DIESEL: Rs 32.25 per litre
Sales tax: 20 per cent on petrol and 12.5 per cent on diesel
Collection: Rs 1,500 crore, which is 40 per cent of the total sales tax

SHEILA DIKSHIT, Chief Minister
"We have waived VAT on the hiked prices in public interest."


PETROL: Rs 47.98 per litre
DIESEL: Rs 35.15 per litre
Sales tax: 20 per cent on petrol and 20 per cent on diesel
Collection: Rs 603 crore, which is 20 per cent of the total sales tax

ARJUN MUNDA, Chief Minister
"We will not cut tax any further. We are already at the lowest floor rate."


PETROL: Rs 51.83 per litre
DIESEL: Rs 35.95 per litre
Sales tax: 30 per cent on petrol and 25 per cent on diesel
Collection: Rs 4,000 crore, which is 40 per cent of the total sales tax

M. KARUNANIDHI, Chief Minister
"The state's financial condition doesn't allow a cut in sales tax on petrol."

You could say everybody loves a fuel price hike for it affords them a chance to be politically relevant. To be fair, a section of Congressmen and UPA allies argued that the Centre should simply trim down its taxes and neutralise the impact of prices. Deora, interestingly, was among the believers. Chidambaram then pointed out that the arithmetic of coalition spending did not match its political beliefs. Very simply, unless he collected these taxes he would not be able to fund the ambitious social schemes of the UPA regime like the Rs 10,000-crore employment guarantee scheme, the Sarva Shiksha Abhiyan, or the Bharat Nirman programme. On his part, Deora presented the fait accompli, stating that PSUs could go into the red unless they were compensated for at least a portion of the Rs 73,500 crore they claimed were the under-recovery. Very simply, under-recovery is the difference between the real price and the price realised by oil companies for goods sold.



PETROL: Rs 53.26 per litre
DIESEL: Rs 35.98 per litre
Sales tax: 33 per cent on petrol and 22.25 per cent on diesel
Collection: Rs 3,865 crore, which is 28 per cent of the total sales tax

"We've cut the sales tax by 0.75 and 1 per cent. Any more cuts will be difficult."


PETROL: Rs 51.33 per litre
DIESEL: Rs 37.87 per litre
Sales tax: 28.75 per cent on petrol and 8.34 per cent on diesel
Collection: Rs 1,750 crore, which is 52 per cent of the total sales tax

RAGHAVJI, Finance Minister
"The Centre must first cut excise duties. What is a 40 paise drop in select states?"


PETROL: Rs 50.62 per litre
DIESEL: Rs 35.83 per litre
Sales tax: 25 per cent on petrol and 21 per cent on diesel
Collection: Rs 4,328 crore, which is 37 per cent of the total sales tax

"The Centre is conspiring to tarnish the image of the state governments."

The Left parties and many in the UPA regime doubt the claim. Dipankar Mukherjee of the CPM argued in a note that the figure was opaque. "This is a notional figure and not actual." Mukherjee asks how the PSUs could be in trouble when they were declaring profits and paying dividends to the government despite claiming under-recoveries of Rs 19,910 crore in 2004-05. There is also the belief that the figures presented by PSU chiefs were calculated on the basis of the import parity price (that is, the cost of the fuels if they had been imported) and ignore the subsidies received by them and the discounts delivered by ONGC. Experts in the Planning Commission believe that while there was a gap in the pricing of the fuel given the rising crude prices, the sum claimed was not losses but loss of notional profits.


The Government has argued with the Left that it will be able to fund the social programmes only if it increases the prices of petroleum products. The truth is that the revenue foregone under various sections is far more than the amount collected cumulatively through petro taxes. Some classic cases ...

Green Channel
Rs 92,561 crore could pay off the entire external debt. It is currently the sum lost in exemptions on Customs duty enjoyed by 98 items. Exporters account for the biggest chunk of Rs 35,430 crore while precious stones and jewellery account for Rs 15,024 crore.

Corporate Luxury
Rs 57,852 crore is nearly half the corporate tax collected last year and is lost due to exemptions granted to various firms. Exports from SEZs, EPZs, FTZs account for a fifth, or Rs 10,740 crore. Infrastructure providers like power & telecom get sops worth Rs 5,832 crore while accelerated depreciation causes a loss of Rs 27,077 crore.

Lost in Excise
Rs 18,018 crore could pay a third of the subsidy. Small-scale industries alone account for Rs 11,316 crore in the income lost from excise exemptions. Then there are other beneficiaries such as fertiliser units and units set up in special category states like Uttaranchal and J&K and in the North-East.

Working Out
Rs 11,695 crore could fund this year's rural employment guarantee programme. This is the amount of taxes that are forgone in exemptions to individuals for specific savings instruments, exemptions on interest income on securities and deposits with banks and on tax rebates for senior citizens and women.

Trapped in Disputes
Rs 65,347 crore is a little less than the Rs 68,000 crore collected last year in personal income tax. The Left may not be always right but it does have a point when it says governments are lazy and do not chase revenue trapped in litigation and arrears.

Capital Gains
Rs 10,000 crore
For three years now, investors in the stock market have had a great ride, thanks to exemptions from long-term capital gains tax. Murmurs within the Finance Ministry point out to the rise in market capitalisation from Rs 12,00,000 crore in 2003 to Rs 30,00,000 crore in April 2006 and estimate that the sum foregone, even by conservative calculation, could be Rs 10,000 crore.

Sarkari Evasion Zone
Rs 97,695 crore could fund half the cost of the Rs 1,74,000-crore Bharat Nirman project. A study done for the Finance Ministry has projected this sum as the possible loss of revenue due to SEZs by 2010. This is thanks to a plethora of exemptions ranging from corporate tax, excise, sales tax, customs and even service tax.

At Shastri Bhavan, Deora, whose ministry had been campaigning for a price hike since February, was speed dialling Congress chief ministers to come to the aid of the party. He also appealed to chief ministers in BJP ruled states as also UPA allies and the Left parties in West Bengal and Kerala. His plea: state governments must exempt the hike from sales tax and help the consumer. The BJP and Left party governments ignored the pleas. "Let the Centre first roll back fuel prices, we'll address sales taxes later," said West Bengal Chief Minister Buddhadeb Bhattacharya. Meanwhile, some Congress-ruled states and the DMK in Tamil Nadu paid heed to Deora's pleas. Maharashtra clipped 80 paise from the hike and Delhi, 67 paise by exempting the hiked portion of petro and diesel prices from state taxes. In vintage style, Vajpayee dubbed the entire exercise of asking state governments to cushion a price hike effected by the Centre "a cruel joke on the common people".

He has a point. Delhi consumers would have had to pay Rs 47.51 for a litre of petrol. Delhi Government's relief of 67 paise amounts to barely one per cent of the price. Indeed, of the Rs 47.51, only Rs 23.52 is the cost of the fuel; Rs 15.17 goes as taxes to the Centre and Rs 7.70 is VAT levied by the state Government. Essentially, taxes account for Rs 22.93 paise or 48 per cent of the price. You could argue that high taxes curb hydro-carbon consumption but the concern is not reflected either in developing alternative fuel systems like bio-diesel and ethanol or feeding the fund flow for conservation methods through grants or subsidies. Compare this with the Asian tigers or advanced countries like the US. All developed economies have an enlightened price policy. In the US, for instance, taxes account for only 17 per cent of the fuel cost. Juxtapose this in the Indian context and the cost of petrol would be Rs 23.52 plus 17 per cent tax. That is, Rs 27.51. This is primarily because it is not based on value but is specific on the volume. It is not that this thought has not occurred to the government. Indeed, committees have suggested this time and again but governments are addicted to easy money and lazy about taking hard policy decisions.



PETROL: Rs 52.06 per litre
DIESEL: Rs 37.5 per litre
Sales tax: 26 per cent on petrol and 24 per cent on diesell
Collection: Rs 2,260 crore, which is 18 per cent of the total sales tax

SAURABH PATEL, Finance Minister
"If there is a need to lower taxes on fuel, it is needed on the Centre's part."


PETROL: Rs 46.79 per litre
DIESEL: Rs 32.33 per litre
Sales tax: 20 per cent on petrol and 12 per cent on diesel
Collection: Rs 1,100 crore, which is 20 per cent of the total sales tax

BIRENDER SINGH, Finance Minister
"By exempting additional VAT, we've saved consumers' 67 paise on diesel."


PETROL: Rs 50.76 per litre
DIESEL: Rs 35.21 per litre
Sales tax: 28 per cent on petrol and 20 per cent on diesell
Collection: Rs 2,580 crore, which is 43 per cent of the total sales tax

"Reducing VAT will not ease the ire against the Congress for hiking prices."

This is why even the protests are a cruel joke. The NDA hiked prices 33 times in six years. It was during the NDA regime that the administered price mechanism (APM) was dismantled. But only in name because just as the Congress is sensitive to the political impact of economic pricing, the BJP too was wary of allowing free pricing of a sensitive good like petrol or diesel. So even though the APM was dismantled, the government continued to dictate procurement and pricing. Indeed, every state ruled by protesting parties is just as guilty as the Congress of duplicity. In a sense it is a compulsion. To appreciate this compulsion consider these figures. Between 2002 and 2006 crude oil prices shot up from $24 a barrel to $75 a barrel. Riding this wave were both Central and state governments which cashed in on the revenues. The Centre's share of the booty (including Customs, excise, OIDB cess, royalty, corporation tax and dividend) rose from Rs 96,751 crore to Rs 126,600 crore. On the other end, the states' share of taxes (VAT/sales tax and cess) rose from Rs 32,156 crore to Rs 48,800 crore. Similarly, levies on petroleum goods by state governments account for between a fifth to as much as 50 per cent of the sales tax on petrol and diesel. Even the Left-ruled West Bengal collected Rs 902 crore or 22 per cent of its revenues from petro-goods sales tax. Some states even collect levies on kerosene and LPG sales.

UNITED IN PROTEST (clockwise): Jayalalithaa with allies in Chennai; demonstrators in Ahmedabad and Amar Singh on dharna in Lucknow

Indira Rajaraman, the RBI Chair Professor at the National Institute of Public Finance and Policy, quotes OECD studies and points out that petro revenues account for just 1.15 per cent of total revenues in the US while the figure is 6.92 per cent in the UK. Compare this with India. Last year, the Centre collected Rs 49,300 crore just in excise, which accounts for 44 per cent of its total excise collections. The total booty collected by the Centre from the petroleum sector-Rs 126,600 crore-was 34 per cent of its total tax revenue. The moot point Rajaraman is making is whether an economy can afford to hinge so much on revenues from one commodity. What happens, for instance, if there is a slideback, as was the case in 2002 when crude prices ruled at around $23 a barrel? Perhaps that may not happen. But even if crude prices revert to, say, $55 a barrel, the Centre and the states which have retro-fitted expenditure to match the bounty could see a drop in revenue by as much as Rs 10,000 crore (the sum being spent on the rural employment guarantee scheme) and may be staring at revenue deficits. Even with buoyant petro revenues, the combined deficit of the Centre and the states is nearly 8 per cent and rises to 9.6 per cent when off- budget items like subsidies (and oil bonds) are added. In a recent report, Morgan Stanley economists Andy Xie and Chetan Ahya state that "India's deficit is the highest among major emerging markets and double that of developed economies".

The crux of the problem is the inability of political parties to blend good economics with good politics. Essentially, successive governments have only lamented the lack of funds for sector spending but have failed to walk the talk on widening the tax net and bringing down exemptions. The Left is not always right but it has a point when it identifies the mounting tax arrears caught in disputes. It is also in favour of taxing of agriculture. In his Budget this year, Chidambaram cited tax exemptions that have cost the nation Rs 192,000 crore in revenue forsaken (see box) ostensibly to enable growth and development. Not all such exemptions would pass the test of equity or diligence. Is there a rationale in allowing punters in the stockmarket to walk away with profits worth crores without paying adequate taxes? Similarly, while there is a need to promote investment and growth, not all exemptions enjoyed by industry are economic in nature. Some are purely political. Also, the exemptions are not so much a loss to the Centre as to the states which would have got two-thirds of the share. Bibek Debroy, secretary-general, PHDCCI, adds that states too have to "wake up and adopt tax reforms suggested by successive commissions".

But tax reforms would have to begin at the Centre. The Government must restructure petro taxes. This could be done by first bringing them under a uniform VAT and then moving towards a system of specific taxes rather than the ad valorem system. Simultaneously, there has to be reform in the tax system to widen the base. The first step should be to go back to the Kelkar Committee and start unwinding the exemption regime. A crisis is often an opportunity. The Government must seize the moment.

-with bureau inputs


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