TRANSPORT FUEL TAXES & FUEL PRICING MECHANISM IN INDIA

5.0 TRANSPORT FUEL TAXES & FUEL PRICING MECHANISM IN INDIA

Tax rates on automotive fuels vary markedly from country to country, ranging from heavy subsidies for all fuels in Nigeria and Iran to high taxes in Europe. Most developing countries tax gasoline - considered consumption good of the rich- more heavily than diesel or kerosene, a consumption good of the poor. Many countries realizing the problems of air pollution and the need for infrastructure developments generate funds by levying higher tax on automobile fuels.

5.1 Objectives of Fuel Taxes

Taxes on transport fuels typically seek to satisfy multiple objectives including the following:

» Raising government revenue for general (non-transport) expenditure purposes.

» Efficiently allocating resources to and within the transport sector.

» Financing road infrastructure and maintenance.

» Reducing encroachments, congestions and environmental externalities of road transport.

» Redistributing income and meeting related expenses.

It is not possible to achieve all these objectives simultaneously through fuel tax policies alone. Most governments complement fuel taxation with other policy instruments - in particular to correct the externalities. In determining the levels and structure of fuel taxation, important compromises have to be made for the effects on government revenue generation, income distribution, the efficient use of roads and environmental pollution. In so doing, the attention must be accorded to the relative importance of each objective.

5.2 Problems of Differential Fuel Taxes

The problem with differential fuel taxation concerns the effects of inter-fuel substitution. The effect of differential taxation on consumption of non-transport fuels further complicates the matter. Imposing very different tax rates on close substitutes, and subsidizing certain fuels used by poor households, invites diversion of low priced fuel to other sectors and creates an incentive for fuel adulteration. For example, the diversion of rationed, low priced kerosene to transport uses (as an adulterant in diesel and gasoline) reduces the amount of kerosene available for the poor, who need it for lightening and cooking. The shortage of kerosene in turn leads to externalities as, the poor are forced to turn to bio-mass a significant source of indoor air pollution and health damage from cooking.

5.3 Fuel Pricing Mechanism in India

India has traditionally operated under an administered pricing mechanism (APM) for petroleum products. This system was based on the retention price concept under which the refineries, oil marketing companies and pipelines were compensated for operating cost and assured return of 12 % post tax on net worth. Under this concept, fixed level of profitability for oil companies was ensured subject to their achieving specified capacity utilization. Upstream companies namely ONGC, OIL and GAIL were also till recently under Retention Price concept and were assured fixed return. The administered pricing policy of petroleum product ensured that products like kerosene, used by the vulnerable sections of the society or product used by the transport sector and the agriculturist may be sold at prices that are insulated from volatility in the international oil market. The Govt. of India, Ministry of Petroleum and Natural Gas in 1995 appointed a Strategic Planning Group for making recommendations to meet the policy objectives and initiatives required for restructuring the oil industry. Based on recommendations of the Group, the Government of India had in November 1997 notified the detail phased out programme of dismantling the APM. The notification provides that the prices of petroleum products, except for PDS kerosene and domestic LPG will be market determined with effect from 1st April 2002. Dismantling of APM is triggering competition among oil refineries, while also providing product with reasonable cost and upgraded quality.