Highly inflammable: Restlessness grows as fuel prices skyrocket

All governments run on taxes but, at some point, as taxes keep going up, they turn predatory and start to hurt people they claim to serve. We are way past that point. Massive taxes on petroleum products are hurting household budgets and transportation costs are impacting the profitability of small businesses.

Per capita GDP in India may be about 20 times less than that of Britain or France but we are now in the same league as we are paying the same levels of taxes as them on petrol. Never mind the fact that we have to pay a much higher part of our incomes in fuels.

This round of high taxes on petroleum products started as an emergency measure in the times of COVID induced lockdown as tax collections from all other sources had dried up. International crude oil prices had crashed, and oil marketing companies were making windfall profits. This promoted the government to raise excise duty on petrol by Rs 13 per litre and diesel by Rs 16 a litre.

For the full year, the government and oil marketing companies make a mindboggling Rs 730 crore per day, a study by Bloomberg Intelligence had indicated- that would be an equal to an additional tax of Rs 5 per Indian, per day. So if you are a farmer with a family of 4, getting Rs 500 a month from the PM Kisan Yojana, you are giving Rs 673 per month to the government as additional taxes on petroleum.

What started out as an exercise to take profit away from the Oil marketing companies has ended in downright excessive taxation as retail prices for petrol have gone up by almost Rs 20 per litre since March 2020, when crude prices were at the historic lows. The government can bring down the prices by at least Rs 10 per litre and provide some relief to the common man, but it wouldn’t because that would expose the fact that the economy itself is hanging by a thread.

The government claims that the economy has recovered from COVID and everything is back to the normal. Truth is, it is not. The only logic that explains government’s obstinance in bringing down tax rates is it wants to keep the fiscal deficit numbers to the lowest level possible. There is still a month a few days before the financial year ends.

To understand this in perspective, COVID forced the government to bring down its tax collection targets for 2020-21 by nearly 12 per cent from Rs 21.6 lakh crore to Rs 19 lakh crore. During this time, tax collections from petrol and diesel when up by a huge 48% and that was from April to November 2020, when the country was recovering from the lockdown.

The government does not seem to be in a hurry to cut down taxes as the CMIE notes that the budget projects tax receipts to rise by 16.7 per cent to Rs.22.2 trillion in 2021-22. In short, the government is either hoping for a dramatic recovery in corporate and personal incomes or is looking to keep improving its revenue receipts by continuing the tax on petroleum products.

Finance Minister Nirmala Seetharaman says that the oil companies fix the prices, not the government but that is only partially correct. The reason why prices are high because taxes are unreasonably high. The oil marketing companies are raising prices only because crude prices are going up but the increase is only marginal and prices will not come down unless the taxes come down.

The story, however, is not about what is happening now but how the government has treated revenues from petroleum through its six years in office. Oil prices were above $100 per barrel through the last few years of the Manmohan Singh government but prices crashed a few months after the BJP government took office. The government did raise tax rates and at an election rally in Delhi in February 2015, Prime Minister Narendra Modi called himself ‘Naseeb wala’ or someone who had brought good luck.

Crude prices have remained soft for most of BJP’s term in office and the government started raising excise duties on petroleum products to generate additional revenue. Between November 2014 and January 2016, excise duties were raised seven times, taking the price up by Rs 6.53 per litre. The price increase in diesel was marginally lower at Rs 6.37 per litre.

To understand what has happened, things need to be seen in the context of how things were in May 2014, when this government took over. In May 2014, the base price and freight costs added to Rs 47.2 per litre, central taxes were Rs 10.39 per litre, state taxes in Delhi were Rs 11.9 and dealer commission was Rs 2 per litre. In 2014, the price of petrol made 2/3rd of the price while state and central taxes added to about 32% and dealer commission was around 3%.

This pattern has changed significantly in Feb 2021 as the commodity itself is 36% of the total price while central taxes make 37% of the costs and total state and central taxes has gone up to a massive 60%. While the price of petrol itself has come down by 32%, the effective rate of tax has gone up from 47% in 2014 to a massive 167% now.

What is worse that it comes at a time when the middle class is barely recovering from the impact of the COVID pandemic and we are threatened by a second wave of the pandemic. Unemployment figures had touched 23% during the pandemic and many continue to be out of jobs as the economy and the middle class was among those hit the hardest. “Middle income households, particularly at the higher income levels, have suffered much more, because they had a lot more to lose. Their loss is in excess of 30 percentage points,” a report by CMIE in July 2020 indicated.

Then there is the question of direct and indirect taxes and the point that governments should tax incomes and not consumption because the rich end up paying too little while the working class ends up paying a disproportionately high level of taxes even on items of daily use.

This has been part of a broader trend where the government has been falling short of its direct tax collections while it has been overshooting its revenue targets for indirect taxes. An Indian Express story in March 2020 indicated that direct tax collections contracted by 3.5 per cent during April-February of 2019-20, while indirect tax collections grew by just 3.8 per cent. The Economic Times reported that the trend is expected to get worse in 2020-21 as “share of indirect taxes in overall tax collections rose to about 56 per cent, the highest in over a decade for the period. This follows a sharp 26-27 per cent decline in direct tax collections.” A very large part of these ‘indirect taxes’ are coming from taxes on petroleum products.

A good government waits for you to earn more and your tax payments go up as your income goes up. A bad government couldn’t care less. It puts a heavy tax on what you consume, even if it means driving down consumption and economic growth. In short, this is how this government has been killing growth whenever the economy has shown any signs of recovery. The taxman shows up to collect the nectar even before the flower blossoms.

Finance Minister Nirmala Seetharaman put it more eloquently in her budget speech in July 2019 when she quoted ‘Yannai pugunda nillam’, a verse offering advice to King Pandian Arivudai Nambi by poet Pisirandaiyaar. She said that a few mounds of rice harvested from a small piece of land would be sufficient for an elephant, and asked, “but what if the elephant itself enters the field and starts eating?”

Looks like the elephant has entered the field and is trampling more crops than it is eating!

Here is what some of the transporters have to say:

Sunil Kumar Sachchar, President, Uttar Pradesh Travel Mahasangh

“Cab owners are severely hit by the fuel price rise. Firstly, we operate our business on tenders under which rates are locked for one year. Even though the fuel prices are rising daily, we are still compelled to run services at the rates we filed in various tenders a year back. Secondly, we are losing the business of walk-in customers who are facing the brunt as we are forced to increase our fare. Thirdly, taxes have also increased as have the insurance premium rates. There are around 27,500 registered cab owners with this union, out of which around 2,500 were forced to shut down during the last few months as diesel prices soared. Some of our members are not able to pay their children’s school fees.

“I fear the worst could happen if things go on like this. We may have the same fate as the farmers and there may be a series of suicides. The day is not far. I cannot see any solution or ray of hopes. PM Modi and his lieutenant Amit Shah are extremely stubborn, they have taken a vow not to listen to anybody’s plea even if you protest for months, even if you die.

“Look at the farmers protest, they are dying, rotting in jails but Modi will not listen. Eventually, more people would shut shop, more would become unemployed and some would die. The trucks and bus owners’ associations also have similar stories. The UPA government was ten times better than this.”

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Suresh Khosla, General Secretary of Bombay Goods Transport Association, and Federation of Bombay Motor Transport Operators

“Diesel price is a major component of our operational cost, around 70-80%, naturally our operations are hit due to high prices. Due to COVID lockdown, the economy is already depressive, there are no load to transport, vehicles are stranded on the roads for months. With rising fuel price the transporters have no alternative but to increase their freight rates which increases the inflation and ultimately affects the common people. During the Manmohan Singh government, the crude prices were higher but diesel never went above Rs.70/litre. The government must take responsibility.

“Post COVID, business is slowly recovering. At this point we need the government’s support. Transport sector is the backbone of the economy. It gives employment to 10-12 crore people but nobody is listening to our grievances. Apart from the fuel prices, the new notification regarding e-way bill is also creating pressure on us.

“Effective January 1, 2021 the validity period of e-way bill changed from 100 km per day to 200 km per day. It is a draconian GST provision which puts both the truck owner and the driver under additional pressure. If the e-way bill expires, the penalty is extremely heavy, around 200% of the tax invoice. The government did not discuss with the transport industry before bringing these GST provisions. They are making us pay GST at 28% tax slab. Are we a luxury service?”

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Mahendra Arya, National President, All India Transporters Welfare Association (AITWA)

“The government does not listen to anybody. They brought in draconian measures in the transport industry without discussing with us and interfered in abusiness model. This is similar to the farmers protests. The e-way bill would cause business shut down and unemployment. The All-India Transporters Welfare Association (AITWA) and the Confederation of All India Traders (CAIT) called for a Bharat Bandh on February 26 to demand the abolition of e-way bill system and reduction and regularization of diesel prices across the nation.

“The government is treating diesel price as a cash cow. Rates are increased on a day to day basis without giving any thought as to how it would impact the operations. Fuel is my raw material (for transport business), if prices keep rising in an erratic manner it becomes difficult to negotiate the freight rate with our customers (traders, manufacturers). Which means my cost price is continuously rising, but the sale price remains same, and business runs into losses.

“We need a system to fix diesel prices and pass on the rate of increase. If one is aware that there is an index according to which prices would rise or fall one can plan and negotiate. Such a mechanism should be brought after discussing with the transport industry.”