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A case of consumer subsidising Govt? -- `Effective' petro subsidy to be Rs 1,400 cr

Balaji C. Mouli

NEW DELHI, March 2

THE Government has projected a subsidy of Rs 4,495.80 crore in the petroleum sector for fiscal 2002. However, estimates indicate that the Centre will collect Rs 1,800 crore from LPG and Rs 1,300 crore from kerosene as excise duty during the same period. The effective subsidy is then only Rs 1,400 crore!

For instance, the Budget has proposed a hike in consumer price of LPG by Rs 40 per cylinder. But the Government estimates show a reduction in net subsidy on a cylinder by only Rs 15 per cylinder — from Rs 85, to Rs 70 per cylinder.

The excise and other levies are currently reckoned on the lower selling prices.

The upward revision in selling price, now proposed, would merely result in a bulk of what the customer would now pay as extra, being accounted as additional excise duty collections and not as reduction in subsidy.

Interestingly, in the case of the fertiliser sector, the subsidy is net of Central taxes as urea does not attract any excise duty.

Why does not the Government then simply put the subsidy burden at Rs 1,400 crore?

One reason could be that while the excise duty is on an ad valorem basis, the subsidy burden to be borne by the Centre is fixed. This means that in case the international crude price rises, excise duty collections will rise while the subsidy burden borne by the Government will remain the same.

The Government has arrived at the subsidy burden and the excise collection on the back of the optimistic crude price of $20 per barrel. So, at a higher crude price, the net subsidy will be considerably neutralised even as the Government will officially claim a subsidy payment of Rs 4,495.50 crore towards sale of kerosene and LPG for fiscal 2002.

The upward revisions in product prices — inevitable as international crude prices rise — would result in higher excise duty collections. The excise duty on the subsidised products is on ad valorem basis, leading to higher revenue realisation. All this while the subsidy remains the same, which results in a higher consumer price.

For fiscal 2002, the Government is expected to mop up an incremental Rs 7,700 crore on account of the increased taxes and levies in the Budget. As per the Budget announcement, Rs 6,500 crore has been earmarked mainly for payment of LPG and kerosene subsidies — Rs 4,495.80 crore — and irrecoverable taxes.

Certain States levy `irrecoverable taxes' which are not a pass-through as importers are not subject to it, like turnover tax, entry tax, etc. In the present system, the oil pool account manages the sale of controlled products — kerosene, LPG, petrol and diesel. The oil pool account reimburses refiners such taxes and recovers it through a surcharge levied in the State where the tax is levied. In the ensuing deregulated scenario involving free pricing, the reimbursements will amount to spreading the tax burden across the consumers.

This is because the Budget provision is being raised through additional taxation on products sold across the country.

In other words, consumers in States that do not charge the irrecoverable taxes will subsidise consumers in States where the taxes are charged! A fall-out of the proposed elimination of the oil pool account and the dismantling of the administered price mechanism.

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