The increase in the prices of petrol and diesel to a three-year high despite the halving of crude oil prices in the international market is essentially because of the high tax burden on these fuels as running cars and SUVs in the country is seen as a luxury.
Both petrol and diesel are supplied by the oil companies to petrol pumps at a little over Rs 30 per litre. It is the imposition of Central excise duty and state government levies such as VAT that result in raising the price of petrol to over Rs 70 per litre and that of diesel to Rs 58.70 a litre.
The price of diesel has been kept lower as it also used in the politically sensitive farm sector. The NDA government had seen an opportunity to raise fresh resources with a series of hikes in excise duty in the second half of 2015 and early 2016 power as global crude prices plummeted to record lows. The logic also seems to have been that consumers had got accustomed to paying high prices for these fuels and would be psychologically able to bear the burden.
Excise duty on petrol was Rs 9.48 per litre in April 2014, which after several rounds of hikes between 2015 and 2016, has now shot up to Rs 21.48. Similarly, the excise duty on diesel was Rs 3.65 per litre in April 2014, which after the hikes, has risen to Rs 17.33.
The increase in excise duty has helped the Centre realise over Rs 1 lakh crore. Petroleum products have been left outside the ambit of GST as these form a major source of revenue for the cash-strapped states who have refused to let go of the lucrative source despite the Centre arguing in favour of a uniform all-India tax for the two fuels.
The variation in prices of petrol and diesel between states is due to the different rates of state levies. Another reason why states do not want petroleum products to shift under GST is that the levies on petrol and diesel are collected for them by the public sector oil companies and passed on directly to the states as a result of which there is no leakage due to corruption as is the case with other state taxes.
Petroleum Minister Dharmendra has explained that the increase in excise duty on petrol and diesel has helped the government to raise additional resources for building hospitals, schools and highways which are essential for economic development.
The Minister further said that for a robust economy, the pricing freedom should remain with the oil companies. In practice, however, the public sector oil companies which come under the administrative control of the petroleum ministry cannot ignore the government's advice.
Pradhan has also stated that the government has no plan to change the system of the current daily revision of petrol and diesel prices based on the international market. He also said on twitter that while international prices of petrol and diesel have risen by 18-20% in the last three weeks, domestic prices of the fuels have been increased only by 4%.
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