Liquid Gold Called “Petrol”

On 24 May 2012, the then CM of Gujrat Narendra Modi tweeted that

“Massive hike in petrol prices is a prime example of the failure of Congress-led UPA government. This would put a burden of hundreds of crores on Gujarat”,

now in 2017, he is the prime minister of India and petrol price is at all-time high then according to his logic this is also a prime example of the failure of BJP- led NDA government. Tourism minister of his cabinet is giving the statement like

“If a person can afford a car or a bike then certainly he is not starving so somebody who can pay has to pay”.

I want to ask that when in 2012 price hike was not justifiable when the price of crude oil was higher than today, then why today when the crude oil price is almost half, then why the government is trying to justify this price rise?

How the prices of  Petrol and Diesel is decided

From 16 June 2017 fuel prices are started to revised on daily basis and this is called Dynamic Fuel Pricing(DFP). Under this mechanism, all the petrol pumps of the country(58,000 in number) change the price of petrol and diesel daily on the basis of the price of crude oil in the international market and foreign exchange rates. Previously this was implemented on pilot basis in 5 cities viz. Udaipur, Jamshedpur, Vishakhapatnam, Puducherry and Chandigarh for 40 days from 5 may 2017.  Before this mechanism, the price was changed on 1st and 16th of every month based on the average price of crude oil and foreign exchange rate of the preceding 15 days.

This shift in price determination has been backed by the argument that, this mechanism will ensure that even the slightest benefit of the change in the oil international market should be delivered to the bottom line i.e. to the distributors and consumers. But it seems that this mechanism is not able to serve its purpose as the crude oil price low but the consumer is not getting the benefit of the same.

After deciding the price of petrol from the oil companies then Central government impose Excise Duty and state government impose VAT( AS Petroleum products are kept outside of GST) on the petrol price and due to these two major taxes its price is this much high and as the rate of VAT differs in states hence different states have different prices.

How does the cost of petroleum products get calculated

Comparative petrol price chart

Comparative petrol price chart

For the reference, I will take Delhi’s petrol product price

Currently, the price of the petrol got decided by dynamic fuel pricing which takes international market’ price of crude oil and foreign exchange rates into consideration for determining the price.

In 2013 the price of petrol in Delhi was ₹ 76.06 when the price of crude oil was $109.45/barrel, and today when the price is $54.58/barrel then the price of petrol in Delhi is ₹ 73.58. So as per the logic of DFP, the price of petrol should decrease but instead, it is touching the new high every day.

So why these prices are not coming down, the reason behind this is that the petroleum sector is considered and used as big money generating industry, the real issue is with petrol policy of India. According to which only government is getting benefits but not the public and this thing are clear from the amount of revenue that government gets from the petroleum sector. In the year 2014-15 was ₹ 3.32 Lakh crore which increases to ₹ 5.24 Lakh crore in the year 2016-2017 which is 3.5% of our GDP.

let’s have a look that how come the government is able to earn this much money.

In April 2014 the price of 1 litre of petrol contains ₹ 9.48 and 1 litre of Diesel contains       ₹ 3.48 as excise duty which has been increased to whopping ₹ 21.48 for petrol and ₹ 17.33 for diesel in September 2017. The central government has increased the excise duty 12 times in past 3 years which is over 120% on petrol and 380% on diesel.

Petroleum product is not a money tree from the central government only but state governments also generate a major part of their revenue from it. Every state imposes VAT on the price of petroleum product whose rate is different in the different state. In Delhi, 27% VAT is added to the price of petrol whereas in Mumbai this rate is 47.64%.

As per the report of PPAC i.e.(Petroleum Planning & Analysis Cell),

  • The Central government has increased the excise duty by 54% on petrol and 150% on diesel from November 2014.
  • On an average VAT is increased by 46% on petrol and 48% on diesel.
  • Dealer commission is also increased to 73% on both.

Mathematics of cost of 1 of litre petrol beared by government

As per the statistics provided by India oil corporation, the cost incurred by oil refineries for 1 litre of petrol is only ₹ 26.65 in Delhi. To get the petrol dealer needs to pay ₹ 30.70 after that ₹ 21.48 is added to the cost as excise duty, then dealer commission of ₹ 3.24 is added into the cost and at the last ₹4.96 is added to its cost as VAT (27% in Delhi). So in an all we need to pay 70.39 to get 1 litre of petrol in which major part is paid as a tax.

India is way ahead of its neighbouring country in the price of petrol which can be seen in below image.


Is there any way to reduce these prices?

As we see that in the price of the petrol that we pay is taxes, so to reduce the price of petroleum product taxes needs to be reduced and that can only be done by taking these products under GST. Even petroleum minister Mr Dharmendra Pradhan is also suggesting the same. It has 4 different bands( 5%, 12%, 18% and 28%) according to which taxes are imposed on the commodities. So if the petrol is kept under 12% GST then the price of petrol in Delhi comes down to ₹ 38.10 from ₹70.39. Even if the 28% of tax is imposed on petrol which is highest in it then also the price will be 43.44. But 28% of tax is kept for luxurious things and as per my understanding petrol is not a luxury but a thing of day to day use so, 28% of tax should not be imposed on petrol.

But it is not that easy to get the petrol price under GST because as per the GST act, the decision to include any product under GST can only be taken by GST council. In this council majority is of state representative and states are in opposition of taking petrol product in GST because if petrol comes under it then it will cut down their revenue that they are getting from petrol.

In the end, I just want to say that government need to reduce the price of this daily need thing. Because price rise of petrol product either directly or indirectly increases the prices of other products and services which result in the high inflation rate. As of now the only way of doing this is to include them also in GST and for this along with the central government state governments also need to take some steps in the positive direction.


6 thoughts on “Liquid Gold Called “Petrol”

  1. Good insightful article! Keep it up mate.
    Since petroleum price is subject to international dynamics, may be the reason that government is not keen on subsuming it in GST. I am not sure though.


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