Petroleum pricing getting tougher

It was only going to be a matter of time before the axe fell on GST, after Petroleum Levy left no room to be further squeezed. Despite having to raise the petrol price to the highest ever in the history, for which it attracted quite some flak, the government had to do it while reducing the GST on petrol drastically to 10.7 percent.

For the first time since December 2018, the GST has been tinkered with. It is also a first since entering the IMF program, where keeping GST for petroleum at standard 17 percent was one of the many conditions. But so was keeping Petroleum Levy at a minimum of Rs15/ltr. The total tax incidence on petrol at 10.7 percent is the lowest in around 12 years. Yet, the retail price is highest ever.

Arab light crude oil for July’s second fortnight stood at the highest since November 2018. It is the base price in rupee terms that stood at the highest ever at Rs96 per liter. The currency depreciation too has played its part, which is why even the lowest tax incidence in nearly 12 years has led to an all-time high retail gasoline price.

The government has so far tilted in favor of direct inflation considerations over the fiscal ones. Both camps have supporters, with one arguing how levying high taxes could lead to lower consumption and in turn lower GDP growth. A theory backed by raw numbers. The other camp insists that delaying the inevitable would only worsen the fiscal side of affairs, and that would eventually have inflationary consequences.

What is increasingly clear is that the government would not be too comfortable levying high taxes if the crude oil price remains north of $70/bbl. The finance ministry was clearly banking on substantially low oil prices justifying the ambitious PL collection target for FY22. Iran sanctions have not really done much to the equilibrium in the global market, and Opec continues to remain the key. July’s petroleum consumption numbers should also offer an indication on how much the prices have dented demand, if any. And that could come in handy, should the government get some room to levy taxes around current oil prices, as new retail high has now been put to test.