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Who FUEL'ed our Fuel Prices?

In this week's FinMail, we take a look at the rising fuel prices despite the International Crude Oil prices being low. Plus, we will also take a look at the tax levied on petroleum products by the central & state governments. And also what does the future holds?


The Story

Petrol Prices reached a lifetime high of ₹84.2/litre in Delhi on Thursday after the oil companies raised prices by 23 paise/litre. The earlier lifetime high was ₹84/litre in October 2018 when the crude oil prices were $80+ per barrel. An interesting thing to note here is that the current International Crude Oil price is around $54-$55 per barrel and yet, the petrol price is highest at ₹84.2. Why so?

Let us even look at the diesel prices.

Diesel prices were also hiked by 24 paise to ₹74.38/litre.


What factors are pushing the fuel companies to raise the prices?

Single reason - Rising Crude Oil Prices.

Crude Oil Prices tanked in March due to the Covid-19 induced lockdown in various countries and now as economic activities have started showing growth, the demand for crude oil is also on the rise. Also, the Brent Crude Oil prices - (our crude oil price is indexed by Brent Crude Oil Prices) have reached the highest after it fell in February and March because of the output cuts as well.

But one important thing to note here is that, even though the Crude Oil prices tanked 20$ per barrel in March, there was no significant drop in the petrol or diesel prices because the government had increased the excise duty on the fuel prices to the similar amounts.

Before we take a look on why did the government raised the taxes on fuel, let us understand how the petrol/diesel prices come into effect and how do we get petrol at ₹80/litre or even more.

To understand this we need to get into some maths.

The whole calculation of the retail price of petrol could be divided into two segments, based on the journey of the crude oil from deep down into the earth to refined petrol into our vehicles.

1. Bringing crude oil from foreign nations to India

2. Refining it and making it available to nationwide.

1. Bringing crude oil to India

India imports around 80% of total consumed fuel from Gulf countries and the remaining 20% is obtained from India's crude oil reserves. As the bill for imports is paid in foreign currencies - usually USD, and because the currency exchange rates are not fixed but fluctuating, some portion of crude oil price fluctuations are also a result of fluctuations in exchange rates as well. Also, the price of crude oil per barrel also varies from time to time to adjust with the demand and supply gap.

Let us understand the costing breakdown till crude oil reaches the refineries:

1 Barrel of Crude Oil - 159 Litres

1 Barrel Crude Oil Price - $53 (Friday)

1 Barrel Crude Oil Price (in ₹) - ₹3869 ($1=₹73)

So, Per Litre Crude Oil Price in ₹ - 24.33/litre

So till the crude oil reaches the refineries it costs ₹24.33/litre which includes the ocean freight as well.

(Source- MyCarHelpline)

2. From fuel refineries to your nearest fuel station

Now that raw crude oil has reached to the refineries, it needs to be refined, crude oil directly can't be used. So refining it would add some costs to the petrol prices as well.

The refinery processing cost, the profit margins of refineries, oil marketing companies' margin, cost of logistics, and freight would add up a cost of about ₹3.84per litre.

If commissions of the petrol pump dealers are considered, it would add ₹3.67 to the cost as well which would add up to the total cost of refined petrol to ₹31.84/litre.

(Source - MyCarHelpline)

What? But the petrol prices are ₹84.2/litre in Delhi then what about the difference of ₹52.36 between the actual price and the selling price of petrol?

This goes to the governments obviously. But how much in percentage-wise?

Almost 165% of the actual price.

For your understanding, the highest GST rate is 28% in India.

So if you go to a petrol pump to fill petrol worth ₹500, ₹310 goes to the central and state government as taxes and ₹190 goes to the actual petrol portion. Take a breath, we will move forward soon.


But why is the government charging too much?

Before we dive in the details let us understand how much the state governments and the central government charge each and also understand the reason behind price differences in various states.

So the central government actually charges ₹32.98 per litre of petrol as the Special Excise Duty and Road Cess, which is even more than 100% of the actual cost.

Adding the centre's tax gives us the price of ₹64.82/litre. The state government adds 30% VAT on that to arrive at the final price of ₹84.2/litre.

Note here that the VAT rate varies state by state and this is the reason why petrol prices are different in different states

Delhi (₹84.2)

Mumbai (₹90.83)

Ahmedabad (₹81.58)

Also, the centre charges ₹31.83 per litre on diesel and the state government charges 16.75%+ additional cess on diesel taking the tax charged on diesel to 158% of the actual price.

How much exactly the States and the Central Government makes on the taxes collected from the sale of fuel?

The total tax revenue from the petroleum sector stood at ₹5.5 Lakh Crores in the year 2019-20 compared to ₹3.3 Lakh Crores in 2014-15. According to a report, tax revenues from this sector accounts for 2% of GDP on an average since the last 10 years. Excise Revenue of the government from petrol products has risen by 94% from 2014-15 to 2019-20.

So it is obvious that it is a big cash cow for the government and foregoing this would be a big dent on the government's revenues.

But, but, but, there's more to it.

Let's look at historical excise duties and VAT on petrol and diesel.

Central Government's Excise Duty on Petrol period wise:

November 2014 - 9.20/litre

December 2017 - 21.48/litre

January 2021 - 32.98/litre

VAT on Petrol period wise:

November 2014 - 20% of the basic price

December 2017 - 27% of the basic price

January 2021 - 30%

Central Government's Excise Duty on Diesel period wise:

November 2014 - 3.46/litre

December 2017 - 17.33/litre

January 2021 - 31.83/litre

VAT on Diesel period wise:

November 2014 - 12.5% on the basic price

December 2017 - 16.75% on the basic price +0.25

January 2021 - 16.75% on the basic price + cess

So the governments have been steadily rising tax rates on the petrol and diesel prices, despite the drop in the international crude oil prices by matching the drop in prices with an increase in the tax rates. And this is the reason why the significant drop of Crude Oil prices in March-April was not reflected in retail fuel prices. So if we take a look, excluding taxes petrol price would only be 32/litre nationwide. Even if the highest GST rate was levied on Petrol, it would cost 40.76/litre. This is the reason why Petroleum Products are not included in the GST structure.


The Future of Petrol and Diesel Prices

The centre earlier in October had sought permission to increase the special excise duty on petrol by 18 and on diesel by 12. which was 10 for petrol and 12 for diesel earlier. The government has utilised only part of its tax entitlement by raising excise duty by 12 on petrol and 9 on diesel. This leaves a further scope of raising the tax incidence by 6 on petrol, and 3 on diesel plus a corresponding increase in VAT components in each case.


Our Point of view:

Now as the petrol price of 80/litre will turn the new normal within the country, the government is expected to keep the petrol prices in this range even if the crude oil falls further. The government could increase its tax spread on fuel prices regardless of the international crude oil prices because of the approval it has on the tax raise. Whatever be the fuel prices, only time will tell.


That is it for this week's Newsletter. Keep Learning. Keep burning less fuel and we will see you next week.

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