The government is reportedly still deliberating options to bring down soaring retail oil prices, which have been raised daily for over ten days now following non-revision over weeks in the run-up to elections in Karnataka, against the backdrop of hardening crude prices and a weaker rupee. The way ahead is to rationalise central and state levies on oil products, before dumping the burden on oil companies. That can wait.
Note that central excise duty and cess on petrol and diesel are levied at fixed, specific rates, as so many rupees per kilolitre, to better manage volatility in global oil prices. However, retail taxes on automotive fuels levied by state governments are at ad valorem rates, as a percentage of price. This serves to amplify the retail price increase when crude prices rise. It would be sensible to convert the state-level levies on petro-fuels also to fixed, specific rates. Further, taxes on petrol and diesel need to be modernised and automotive fuels brought under the goods and services tax regime. Instead of tax on tax and cascading rates across the production value chain of the main oil products, provision for tax set-offs at each stage will lighten the impact of higher fuel prices on the cost of logistics and energy. True, the scope for tax credits is restricted in the case of oil products the world over. The point is that bringing petrol and diesel under GST, albeit with limited provision for tax set-offs, can considerably boost productivity in transportation and logistics across the board.
In parallel, we need to promptly overhaul market design in the retail oil segment, and not keep it effectively ring-fenced from the larger retail industry, as the exclusive preserve of oil companies. Abroad, in the mature markets, independent oil retailers account for about half the overall offtake of oil, and we need such a competitive regime for oil retailing here to bring down costs and boost productivity and service quality. The bottomline is that outright subsidies for automotive fuels would make no sense.