Why Petrol Prices Remain Stable Despite Falling Oil Prices: An Analysis of Central and State Tax Impacts

Introduction

The performance of the Indian government, particularly the Modi government, in the context of petrol pricing has often drawn public scrutiny. Despite significant drops in global oil prices, the government has not reduced the price of petrol. This article explores the reasons behind this decision, focusing on the impact of both central and state taxes.

Central Government's Role in Petrol Pricing

The central government's role in petrol pricing is primarily through its excise duty on petrol. As of the latest updates, the central excise duty on a litre of petrol stands at Rs. 19.90. This tax is fixed and does not fluctuate with changes in the international or domestic oil prices. It is important to note that the decision to reduce or increase this tax is solely within the mandate of the central government.

Public Perception and Expectations

Amidst an increase in government stability and electoral success, there has been little public pressure on the central government to reduce petrol prices. However, this does not mean that the issue is unimportant. Instead, it highlights the need for transparency and regular updates on the components of the final retail price.

The Role of State Governments

Interestingly, the pivotal factor in the current petrol pricing scenario is not the central government but state governments. Many state governments impose significant Value Added Tax (VAT) on petrol and diesel, which can greatly affect the final retail price. This has led to variations in the price of petrol across different states within India.

Case Study: Comparing Delhi and Telangana

For instance, consider the price of petrol in two different states: Delhi and Telangana. In Delhi, a litre of petrol costs Rs. 97, with Rs. 57 being the basic price set by oil companies, Rs. 4 going to dealers, Rs. 20 to the central government, and Rs. 17 to the Delhi government. On the other hand, in Telangana, the price is over Rs. 110. This price difference is not due to changes in the basic price set by oil companies or the central excise duty, but rather the high VAT levied by the Telangana government.

Impact of VAT on Petrol Prices

It is crucial to understand that the VAT charged by state governments fluctuates based on the basic price set by oil companies. This means that every time the basic price of petrol is increased, the VAT also goes up. However, unlike the fixed central excise duty, the state VAT is not capped by the central government.

Examples of Variations in Petrol Prices Across States

Some examples illustrate this further. The price of one litre of petrol in Maharashtra is Rs. 109, in Rajasthan and Madhya Pradesh it is Rs. 108, in Bihar it is Rs. 107, and in West Bengal it is Rs. 103. In contrast, Delhi charges a slightly lower price, contributing to a lower VAT rate.

Conclusion

The central government has taken measures to reduce central taxes, such as excise duty, but the responsibility of lowering petrol prices lies more on the state governments. The focus on state VAT imposes a significant barrier to lowering the retail price of petrol. Understanding these intricacies is key to grasping the current situation in India's petrol pricing dynamics.