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Excise Hike on Fuel Announced, But Prices to Remain Unchanged

May 8, 2020 1:50 PM 3 min read
Editorial

The Government of India (GOI) has announced the steepest ever hike in excise duty on fuel, raising it by ₹10 per litre for petrol and ₹13 per litre for diesel (effective Wednesday).

With this, total excise duty has risen to ₹32.98 per litre for petrol and ₹31.83 per litre for diesel.

This is in a hope to rake up to ₹1.6trn ($21bn) of expected additional revenue, at a time when other sources like GST have been hit due to the COVID-19 lockdown.

Oil is Well?

Interestingly, this happened shortly after several state governments increased Value Added Tax (VAT) on fuel and when the Centre had already spiked excess duty and road cess earlier in March in an attempt then to shore up an additional ₹39,000cr ($5.2bn) in revenue.

Moreover, GOI also passed an amendment to India’s Finance Bill, giving it powers to increase the excise duty by an additional ₹8 per litre in future.

Now common sense says an increase in excise duty would imply a rise in fuel prices for the end user i.e. People (called the ‘Retail Selling Price’ or RSP).

However, GOI insists there won’t be any change.

 

Excise Hike on Fuel Announced, But Prices to Remain Unchanged
The Government of India (GOI) has announced the steepest ever hike in excise duty on fuel, raising it by ₹10 per litre for petrol and ₹13 per litre for diesel (effective Wednesday).

 

What’s Happening Here?

The idea here is that any potential rise in RSP due to increase in taxes (excise duty, VAT) is being balanced by the recent drop in International Crude Oil Prices. But if Crude Oil Prices have come down and taxes on fuel are being increased, but the end user pays the same...who is paying more?

It’s the Oil Marketing Companies or OMCs (like IOCL, BPCL, HPCL etc.), who buy Crude Oil, get it refined into petrol, diesel and distribute it to the gas station. OMCs are cushioning the end-user (not really cushioning but ensuring that there is price parity) and passing on higher revenues to the Government.

The Breakdown

Here’s a look at what makes up the price of Petrol and Diesel (in ₹ per litre). Source: IOCL:

 

What makes up the price of Petrol and Diesel (in ₹ per litre).
What makes up the price of Petrol and Diesel (in ₹ per litre).

 

A Game of Numbers

Now, the Base Price of Petrol and Diesel (marked in the red box) are driven by International Crude Oil Prices (which are variable) plus refinery margins and processing costs (which are fixed, more or less).

As of today, the Base Price is ₹18-ish per litre.

Guess what it was only a month ago? ₹26 per litre. 

How much was it two months ago? ₹34 per litre!

You see? Government is simply increasing taxes to leverage this reduction. It is no wonder IOC (-2.41%), BPCL (-1.31%) and HPCL (-5.94%) share prices have taken a beating.

Now how is it that end-users never seem to get the benefit of International Crude Oil prices going down, irrespective of the coronavirus pandemic?

This is because India follows a market-linked pricing regime called trade parity pricing for petrol and diesel, which gives the Government the opportunity to pocket most of the gains. Also mighty good for refiners. :) 

 

Bonus: Here’s a more detailed guide to understand Indian fuel price breakdown. Never mind the dated numbers - the principles are the same.

FIN.

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