Thursday, June 05, 2008

Why taxpayers are better off with a fuel price hike ?

There is a lot being said about the fuel price hike, so here are my views on it. If you are a tax paying citizen of India (a very few in this country which at the moment is less than 10% of the population) you are better off with the fuel increase. 

With the prices of crude going up around the world the cost of buying crude for the oil companies is going up. If the costs of the inputs go up the cost of the output too is bound to go up. With the government controlling the price of gasoline this increase in output is not being transferred to the consumer. This increase is being borne by the government that gets its money from the tax payers. Hence it is our tax money that is going into subsidizing the cost of gasoline in this country.

So if you are a tax paying person you are paying for the subsidy on the fuel that the citizens who are not paying tax are using (almost 90%). So if you are paying your taxes then you are better off with the prices going up. 

The government should stop all subsidies on fuel and use the huge amount of money that it will save from this in improving the public transport infrastructure in our cities and also the infrastructure such as roads and railways so that we do not have to depend on individual transport. It should spend all this money in making CNG available which we have in abundance in the Krishna-Godavari basin in abundance available to all public transport such as busses and autos. This will reduce our dependence on crude oil and will also make our cities cleaner. Its time we took up some of these measures on a war footing.

This is a personal view and I would love to hear your take on this hot topic. 

6 comments:

Vidhyashankar K said...

Unfortunately, in a populist nation with an ex-finance minister as the PM, it is going to be really difficult to let the petrol prices float.

A move of this type is going to needs guts on the government's part to do what's right. Till now, its never happened.

Kiran banda said...

I was watching CM's interview on TV, the other day and it was said that even the govt.of AP is planning to take measures as described in your post :-)

Saurav.m@gmail.com said...

Wrong analysis. By hiking price do we taxpayers get any relier.

Tax level is same and petrol price going up.

sudeepdsouza said...

@Saurav : By not hiking the prices the government is going to foot the difference between the cost of procurement and the price at which we buy petroleum and since the government is run on the tax we pay they will be forced to increase the tax as they will need more money to pay for the rising cost of procurement.

So by increasing the price the benefit we get is that all petroleum product users are equally bearing the burden rather than the few who do pay taxes if the prices are not increased.

The relief you get as a tax payer due to increase in prices is that - you don't want to be paying higher taxes at a later date when the economy is all screwed up because they over subsidised petroleum products in an election year.

Jitendra Nath said...

Hi Sudeep,

It’s a nice topic ot discuss on and I would like to share my opinion. I agree with your statement “if you are a tax paying person you are paying for the subsidy on the fuel that the citizens who are not paying tax are using”.

It is economic suicide to continue to subsidise fuel irrationally. While there is a huge crib about how everything will become expensive. When something is in short supply, we are all willing to pay extar for it. Rather than scamper our oil companies by leading them down the road to losses, we sholud re-adjust the price of fuel to match it to it's input cost. This is the only rational course to pursue. More importantly, once we start doing this, usage of oil will drop significantly, demand will slow down, suppliers will be forced to lower costs. This is how fundamental economics works.

This is a break up considering crude oil at 130 $ per barrel. below details are for per liter petrol in Rs.
* Basic Price = Rs 21.93
* Excise duty = Rs 14.35
* Education Tax = Rs 0.43
* Dealer commission = Rs 1.05
* VAT = Rs 5.5
* Crude Oil Custom duty = Rs 1.1
* Petrol Custom = Rs 1.54
* Transportation Charge = Rs 6.00
* Total price = Rs 51.90

The govt can reduce the duties for a specific duration on oil products to give relief and increasing prices in phased manner will be viable option but these are only the short term measures. Even reducing duties will impact other luxury programmes of govt like waiving of loans to Farmers to the magnitude of Rs.10,000 Crores which in no wya will help the people who need it.

To save the oil companies from teh under-recoveries, the Government considers a cess or surcharge on income-tax and corporate tax. The revenue generated by this is not expected to be significant.

Only 1 per cent levy of cess would generate a single digti impact on the estimated under-recoveries. Over 90 per cent of the under-recoveries would still remain unaddressed. Therefore as all taxpayers, face the brunt of accelerating commodity prices and enhanced cost of capital, with slowdown in the global economy, tampering with the tax rates can be counterproductive . I feel this is certainly not a progressive solution.

If cess is not a progressive solution, this leaves with price increase only. But given the high duty rates on motor spririt and high speed diesel, a price rise would only provide physical relief to the pain of the oil companies and increase the revenues of the govt.

The way forward with regards to teh fuel policy is to achieve fiscal rationalisation at both the Central and State levels, by reducing the custom, excise and sales tax rates and then allowing free market forces to apply to motor spirit and high speed deisel, with subsidies from the budgetary allocation for kerosene and domestic LPG. This way the blow can be softened as it is shared among all the stakeholders — the Central Government, the State governments and the consumers.

I would like to hear all others opinion.

sudeepdsouza said...

@Jitendra : I think you have very beautifully with numbers echoed my sentiments on the subject. As I have already stated subsidising the price of petroleum products is not the way forward.

Oil bonds that are being issued will also come back to bite us.

The Balance of Payments in the governments current account is very bad. It is a deficit of 17.4 billion USD as against a surplus of 1.04 billion USD a year ago. (source : http://economictimes.indiatimes.com/News/Economy/Bleak_fiscal_current_account_outlook_in_India_for_0809/articleshow/3183253.cms).

We are just making life in the future worse for ourselves by being populist in an election year.