Taxing prices

It is high time Parliament took serious note of the sordid story of the unwarranted hike in the prices of petroleum products.

AFTER months of vacillation, the Union government has raised the price of petrol and diesel by Rs.2 and Re.1 a litre respectively. The leftist parties and the National Democratic Alliance (NDA) led by the Bharatiya Janata Party (BJP) have demanded a rollback, failing which they propose to hold widespread mass protests.

Like the car of Jagannath, the wooden-framed government may not be inclined to retrace its steps unless there is a threat to the stability of the ministry. At a press meet in Mumbai on January 3, Murli Deora, Minister for Petroleum and Natural Gas, said that hiking the retail prices of oil was not the only way to combat the rising prices of crude oil and that the government would be in touch with all parties on the issue. It appears that the Minister has failed to honour his word about discussing the matter with the opposition parties before taking the final decision. This irked Gurudas Dasgupta, leader of the Communist Party of India (CPI), so much that he said: It is a damn lie to suggest that the left parties were consulted before the unprecedented fuel price hike. In parliamentary practice, to tell an untruth is a reprehensible offence.

Instead of announcing the new administrated prices on February 15, the government could well have waited for 10 days more and had a full debate in Parliament.

Regarding the pricing of petroleum products, the Departmentally Related Standing Committee on Petroleum & Natural Gas of the current Lok Sabha has already made an in-depth study and given its recommendations in its Sixth Report, which was submitted to the House on April 4, 2005. Let us see how far the government has given consideration to the questions raised and the recommendations made by the standing committee.

There are 17 Departmentally Related Standing Committees, each with not more than 45 members, 30 from the Lok Sabha and 15 from the Rajya Sabha. The function of each standing committee is to consider Bills, demands for grants, annual reports and national basic long-term policy documents pertaining to Ministries/departments. Standing committees submit their recommendations to both Houses of Parliament.

In India, there are 18 refineries, 17 of which are in the public sector and one of which is in the private sector. India now imports about 70 per cent of its crude, with the indigenous share amounting to just 30 per cent of the requirement. In its Fourteenth Report of April 2007, the standing committee expresses its concern that production of crude oil by the Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) has remained more or less stagnant for the past 10 years. The basic failure of the government in not fulfilling time-bound schemes and targets has been the major cause for the mismanagement of the petroleum sector and for the punishment of the consumer with the inclusion of more and more taxes in the selling price of petroleum products.

The total refining capacity in the country as on October 1, 2004, was 127.37 million metric tons (MMT) per annum. The private refining capacity of Reliance Industries Limited (RIL), Jamnagar, was 33 MMT, which works out to 26 per cent of the total refining capacity. The rest, 74 per cent, was with public sector refineries.

Under the chairmanship of N. Janardhana Reddy, the Standing Committee on Petroleum & Natural Gas of the current Lok Sabha presented to Parliament in August 2005 its Sixth Report, titled Pricing of Petroleum Products.

On the procedure to be adopted for pricing crude oil, the first recommendation of the report states: ...w.e.f. 1.4.2002, the price of indigenous crude is being determined on the basis of crude oil agreements between the producers and the refiners by benchmarking various indigenous crude oils to equivalent international crude oils. This, the Committee understand, allows ONGC and OIL to charge import parity prices for the crude produced in India, by linking the prices to international crude prices. Components like ocean freight, insurance, customs duty, ocean loss, port dues, etc., are added to the Free on Board (FOB) price of the respective marker crude in the international market to calculate the import parity price of domestic crude. In the opinion of the Committee such factors which are in no way connected to domestic crude production should not go into calculating the price of domestic crude. The Committee, therefore, recommend that the Government should peg the price of domestic crude to the Free on Board (FOB) price of the respective marker crude in the international market (emphasis added, throughout).

In its reply, the government did not accept the recommendation of the committee about the pricing of crude oil, stating that in order to formulate a long-term pricing policy, the government had constituted a committee, under the chairmanship of Dr. C. Rangarajan, to examine different aspects relating to the pricing and taxation of petroleum products and that the committee would suggest a comprehensive mechanism for the pricing and taxation of sensitive petroleum products and other allied issues.

On the reply from the Ministry of Petroleum and Natural Gas, the standing committee in its Tenth Report (page 10, point no. 7) of June 2006 stated: However, from the data furnished by the Ministry in a reply to the questionnaire on Demands of Grants 2006-07, it appears that the Rangarajan Committee has not made any specific recommendation on the issue of indigenous crude pricing. Taking note of the fact that components like ocean freight, insurance, port dues, etc., are in no way connected to domestic crude production, the Committee reiterate their earlier recommendation and emphasise that the Government should peg the price of domestic crude to the FOB price of the respective marker crude in the international market.

Obviously, the Ministry had given incorrect and misleading information to the standing committee. It may be noted that a parliamentary committee is a miniature Parliament and enjoys all the powers and privileges of Parliament. Giving deliberate and misleading information to such a committee is a grave breach of privilege. Parliament should take serious note of it.

Taxation on petroleum products forms an important source of revenue for the Central and State governments. Regarding pricing of petrol, the components are (i) price without taxes, (ii) customs and excise duties of the Centre plus 2 per cent education cess, and (iii) sales tax (including irrecoverable taxes) in the States.

The State sales tax rate on petrol varies from 33 per cent in Andhra Pradesh to 18.9 per cent in Manipur and on diesel from 34 per cent in Mumbai to 8.23 per cent in Tripura. Entry tax, or octroi, is levied on the movement of crude in some States, for instance, it is 4 per cent in Mathura, Uttar Pradesh, and Panipat, Haryana; 3 per cent in Mumbai, Maharashtra; and 2 per cent in Barauni, Bihar, and Mangalore, Karnataka.

In Table 1, the standing committee points out the exorbitant share of taxes in the retail selling prices of petroleum products. The table reveals that the total tax collected by the Union and State governments exceeded the price of petrol before the tax. The percentage of total taxes on petrol in Mumbai, Chennai, Kolkata and Delhi was 146 per cent, 138 per cent, 132 per cent and 112 per cent respectively. After the recent price hike in petrol, the percentage of total taxes on the price without taxes may increase steeply.

According to the information provided by the Ministry of Petroleum and Natural Gas to the standing committee, the contribution of petroleum products in 2004-05 to the Central exchequer was Rs.77,692 crore and to the State exchequer Rs.43,254 crore. Further, it was noted that with the receipt of customs and excise duties (including cess) in 2004-05, the contribution of petroleum products was Rs.54,738 crore, forming 35 per cent of the total receipts of those items by the Central government.

The standing committee recommended that the government scrap the import parity pricing method for petroleum products and instead go in for a more realistic method.

Though the government has hiked the price of petrol by Rs.2 and of diesel by Re.1, it may be noted that in India the consumption of diesel is four times that of petrol.

While the Union government has raised petrol and diesel prices, it has not accepted a reduction in the customs and excise duties on petroleum products. As customs duties have been kept at the old rates, the larger the payment for the crude imported at the enhanced global price, the more the revenue for the government. For instance, when the Union government hiked the prices of petroleum products in June 2006, Union Audit Report No.7 of 2007 (indirect taxes) reveals that the actual receipt of customs duties for the year 2005-06 was 22 per cent more than the Budget estimates as can be seen from the following data:

(i) Budget estimate: Rs.53,182 crore, (ii) Revised estimate: Rs.64,215 crore, (iii) Actual receipt: Rs.65,050 crore and (iv) Percentage of increase in the actual receipt on the Budget estimate: 22.32 per cent.

About the significant increase in the receipts of customs duties over the Budget and revised estimates, the audit report states: Actual collection was more than both the Budget and Revised Estimates in 2005-06, mainly due to increase in collection of import duty on petroleum products, chemicals and machinery and transport equipments.

On the exorbitant share of taxes on the prices of petroleum products, the standing committee in its Sixth Report recommended:

9. The Committee note that the various taxes and duties levied on products are responsible for their higher retail selling prices. As of now, taxes which comprise customs, excise and State level duties are about 132% of the basic price of the products in the country. The Committee also find that among the developing countries, India has a higher share of taxes in the retail selling prices of products in comparison to most other countries. The share of taxes in the selling price of petrol in Sri Lanka, Thailand and Pakistan is 37%, 24% and 30% respectively. In the case of diesel, the other countries have kept the taxes to less than 20%. Out of the retail price of petrol in Delhi, 57% is tax component. For diesel this component is 35%. Thus, the tax component or the non-fuel component results in exorbitant prices of these products. The Committee, therefore, recommend that the total share of taxes and duties in the retail selling prices of commonly used fuels including auto fuels should be rationalised.

The Tenth Report on the action taken by the government stated that the committee had not received a final reply to the above recommendation. The Tenth Report was submitted in May 2006, and it is not known why the Ministry of Petroleum and Natural Gas has not attached any importance to the vital questions raised by the parliamentary committee and has not sent its replies and explanations in time. Parliament should take serious note of the Ministrys inordinate delay in attending to the recommendations.

Though the government announced a hike of Rs.2 for every litre of petrol, the final selling prices will tend to be slightly higher. The selling price of a litre of petrol in Mumbai has increased from Rs.48.38 to Rs.50.51, resulting in an actual price increase of Rs.2.13. Similarly, the selling price in Chennai has increased by Rs.2.17 and in Kolkata by Rs.2.09. The increase in the selling price of petrol in Delhi is only Rs.2.

Similarly, against the Re.1 hike in the diesel price, the actual increase in its selling price in Mumbai is Rs.1.14, in Chennai Rs.1.10, and in Kolkata Rs.1.05. The increase in the selling price of diesel in Delhi is only Re.1 as announced.

If a customer in Chennai buys 50 litres of petrol, he will have to pay an additional Rs.108.50 and not Rs.100. Similarly, a lorry owner in Mumbai buying 100 litres of diesel will have to pay additionally Rs.114 and not Rs.100.

Cess is levied by the government under the Oil Industry (Development) Act, 1974, which was enacted following the steep increase in the international prices of crude oil and petroleum products in 1973. The Oil Industry Development Board (OIDB) was constituted in January 1975 under the Act to provide financial assistance for the development of the oil industry.

In its Fourteenth Report in April 2007, the standing committee points out the expenditures wrongly incurred out of the cess collected:

3.12. The Committee find that the annual collection by the Central Government from the cess levied on indigenous crude has been to the tune of Rs.5,000 crore and that since inception and up to 30th September, 2006, the Central Government has collected more than Rs.64,000 crore as cess on crude oil out of which a paltry amount of Rs.902 crore (1.41%) has been made available to the Oil Industry Development Board (OIDB). The Committee, in their previous years Report on Demands for Grants (9th Report, 14th Lok Sabha), had expressed their concern over the non-availability of adequate amounts to OIDB from the proceeds of the cess and desired to know the various activities on which the cess amount was utilised.

The Ministry of Finance, to whom the recommendation was forwarded by the Ministry of Petroleum & Natural Gas for comments, had attempted to substantiate that the expenditure on oil industry was in excess of cess collection by furnishing data on Capital and Revenue expenditure incurred on Petroleum, Petrochemical and Fertilizer Industries. In the relevant Action Taken Report (13th Report, 14th Lok Sabha), the Committee have already rejected the contention of the Ministry of Finance and categorically recommended that the expenditure on activities pertaining to production of Fertiliser/Petrochemical should not be adjusted from cess collection. The Committee considers that the adjustment of accruals from cess against revenue expenditure is not justified and hence recommends that the whole issue of deployment/utilisation of cess levied on crude oil should be referred to C&AG for a comprehensive examination. The Committee also reiterate their earlier recommendation that a Price Stabilisation Fund should be created by using the money collected from cess on indigenous crude to bring in stability in the prices of petroleum products and insulate the consumers from the volatility in the international oil market.

The standing committee found that the Ministry of Petroleum and Natural Gas committed the grave error of financial mismanagement by spending only 1.41 per cent of the cess collected for the purpose for which it was enacted by Parliament, and the rest was wrongly adjusted to expenditures unconnected with the development of the oil industry. The Ministry is responsible for the misuse of 98.58 per cent of the cess fund, to the tune of Rs.63,098 crore, in expenditures extraneous to the purpose of the cess collected.

It may be argued that the phenomenal increase in the number of passenger cars and motor vehicles in India has been the cause for the steep demand for petrol and diesel products. However, if one compares the increase in the number of cars and vehicles in various countries during the period 1990-2004, one finds that there has been a greater increase in several other countries and that they have managed without the alarming increase in fuel prices. It may be noted that the period chosen, 1990-2004, correlates with that of the development of the globalised economy in India and other countries. It is found that some developing countries in Asia have seen a rapid increase in the number of cars and vehicles. However, according to the 2007 World Development Indicators, the fuel prices in India for a litre of petrol and diesel for the year 2006 were $1.01 and $0.75 respectively, whereas fuel prices in China (0.69/0.61), Malaysia (0.53/0.40), Pakistan (1.01/0.64), Sri Lanka (0.88/0.55) and the United States (0.63/0.69) were kept lower.

When an oil refinery exports petroleum products, it is given duty drawback benefits in the form of an advance licence, enabling duty-free import of raw materials. Under this scheme, an eligible quantity of crude oil can be imported at concessional rates against the exports.

With the increase in the refining capacity over the years, India has emerged as a net exporter of petroleum products. The major products exported are diesel, petrol, naphtha, ATF (automatic transmission fluid) and fuel oil. The standing committee asked the Ministry whether some companies were exporting refined petroleum products without marketing them within the country.

The Ministry replied: Refining companies like RIL and MRPL [Mangalore Refinery and Petrochemicals Ltd.] have been exporting petroleum products especially transportation fuels MS, HSD and ATF without marketing them in the country as marketing rights for these fuels prior to deregulation of petroleum sector were available only to four oil marketing companies namely, IOC, BPC, HPC and IBP [Indo-Burma Petroleum]. Other products in surplus are also being exported.

The Ministry gave the standing committee the particulars of production, exports and percentage of production exported by each of the companies (Table 3).

From Table 3, it may be noted that only four oil-marketing companies, namely, Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPC), Hindustan Petroleum Corporation (HPC) and IBP, were earlier eligible to export petroleum products. It has to be ascertained when and why the deregulation was made. In the particulars of exports made, it is not discernible why IOC, with a production of 34,149 thousand metric tons (TMT), was able to export only 3.5 per cent of its production, while RIL, with a production of 31,904 TMT, was able to export 32 per cent of its production and also make 59 per cent of the total exports of the country. It has to be discovered why public refineries with more experience and larger capacities could not perform like a private sector refinery with less experience and a lower capacity had done.

Taking note of this, the standing committee made the recommendation: Under the scheme, the Finance Ministry forgoes customs revenue and the exporting companies benefit immensely, both by the duty concession and the exorbitant global prices for their products. The Committee do not agree to such a concession, when huge international prices alone can take care of the profit of the exporters. The Committee, therefore, recommend that the Government should withdraw the duty drawback incentive for export of petro goods. The Government can then make use of the revenue gains on customs front to bring down the excise duties on fuel and thus pass on the benefit enjoyed by the exporters to the consumers in line with the stated policy of equitable distribution of burden.

The Ministry of Petroleum and Natural Gas did not accept the recommendation on the grounds that the rationale behind providing drawback/advance licensing on inputs is to make Indian exports competitive in international market to the extent of duty suffered on inputs. The benefit is only given when there is value addition on export of finished products. Further, the duty drawback/advance licensing is applicable to all industries and is not particular to the refining sector.

In its report on the action taken by the government, the standing committee reiterated its recommendation: From the analysis of the Action Taken Reply, it appears that the Government has not understood the crux of the recommendation. The Committee had recommended that the customs duty waiver given to the exporting companies on part of their crude imports should be discontinued and the revenue gained by the Government in the process should be passed on to the consumer by way of reduction in excise duties on petroleum products. As huge international prices alone can take care of the profits of the exporters, the Committee reiterate their earlier recommendation that the Government should withdraw the duty drawback incentive for export of petroleum products.

The above mentioned report of the standing committee was submitted to Parliament in May 2006. It seems that the Ministry has not yet given its reply.

The Sixth Report contained 15 recommendations. According to the Tenth Report, the Ministry had accepted only two recommendations and rejected about four others, which the committee then reiterated. Further, the Ministry has not submitted its final replies in respect of nine recommendations. It is yet to be known whether the Ministry has by now given its final replies on the pending recommendations. The unwarranted hike in the prices of petroleum products, especially diesel, will definitely increase transport costs, which will have a cascading effect on the prices of commodities and the cost of living of the working classes and the poor.

It was reported in the press that the Minister for Petroleum and Natural Gas pleaded at a Cabinet meeting for the alternate reduction in the taxes on petroleum products, which was emphatically turned down by the Finance Minister. In the decision-making body of the Cabinet, there was someone to plead for the shifting of the burden of the price hike away from the Petroleum Ministry and there was some other person to defend successfully the decision of the Finance Ministry. The pity is that there was no one in these high decision-making bodies to plead for the common man.

It is high time Parliament took serious note of the sordid story of the unwarranted hikes in the selling prices of petroleum products and arranged for a close scrutiny by the Comptroller and Auditor General of the financial and administrative mismanagement by the Ministry of Petroleum and Natural Gas. At this stage, only Parliament can give relief to the people, who are being fleeced and are expected to pay for the flawed formulae used to price petroleum products and for the inexcusable irregularities committed by the Ministry.