How rising oil prices make governments hit by Covid happy

After a staying immovable for 82 days, the oil prices are moving north again. For fifth consecutive day, oil prices went up on Thursday by 60 paise for both petrol and diesel.

Cumulatively, the petrol price has gone up by Rs 2.74 per litre and diesel by Rs 2.83 litre in Delhi. Similar increase in petrol and diesel prices has happened at other places.

The oil marketing companies have blamed the hike on increase in crude oil prices in the international markets. Crude oil is now selling around $40 a barrel, almost double the price it sold in May.

However, when crude oil prices were falling in March-April, the oil companies did not pass on the benefit to the consumers. The government, instead, hiked the excise duties by Rs 10 on petrol and Rs 13 on diesel in May.

The companies said they would compensate under-recoveries, the government hoped to mop off Rs 1.6 lakh additional revenue. The companies also did not pass on the hiked tax burden on the consumers during lockdown.

Now, the prices of petrol and diesel are rising.

According to the price build-up statistics of the oil marketing companies, one litre of petrol costs a dealer Rs 18.28 in Delhi. With the fifth consecutive day hike, the retail price of petrol reached Rs 74 in Delhi. The gap is filled by excise duty by the Centre, dealer’s commission and the VATs by the state government.

Still, the companies say there is a difference of around Rs 4-5 between the cost and sale price of the fuels. This indicates that the oil prices will continue to rise. This also means the governments would be happier, particularly the state governments as they benefit from floating benefits of VAT charged in percentage.

Petrol and diesel prices at the station vary from one state to another due to varying rate of VAT or sales tax and other levies and cesses wherever charged. An examination of the Petroleum Planning and Analysis Cell (PPAC) data shows that states adopt different taxation strategy to maximize their oil revenue.

Majority of states including Delhi and Maharashtra levy ad valorem duties which means rising prices give them more oil revenue. Some others have a safety valve of specified rate to shield them from a revenue shock if prices fall sharply. Uttar Pradesh and West Bengal are among such states.

Another interesting point that emerges from PPAC data is that the states hit hard by coronavirus lockdown are generally also the states with higher VAT or sales tax.

Rajasthan levies 38 per cent VAT and a road development cess. Maharashtra levies only 25 per cent VAT but adds Rs 10.12 per litre as additional tax making the fuels one of the costliest in the country. Delhi and Tamil Nadu too earn heavily from oil sale.

For most states, liquor, petroleum and real estate are biggest sources of earning. Real estate sector is in tatters right now. Graded opening and Covid-19 fear has hit liquor sale in almost all states.

This makes rise in petrol prices good news for state governments. This also explains why more than half the state governments have hiked VAT or sales tax on petroleum recently.

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