Soaring prices of fuels in India

Introduction

Voted as one of the most hospitable and comfortable countries to live in, India has always been warm to humans. A 100 reasons to visit and stay but the petrol prices are not one of them.

There are two things that are totally out of control of our government - The monsoons and the petrol prices. Monsoon depends on the geological changes and developments, and fuel prices on the crude oil rates in the international market. Well! it is not that simple, when a sphere involves politics and that too inseparably.

I will be talking about the hottest topic of the country, which is rarely below the boiling point - The reason behind petrol prices being so high and the Laws related to Oil and Gas Industry -

The oil and gas sector is one of the core industries in India and contributes approximately 15% to the total gross domestic product (GDP) which is one hell of contribution. The industry was approximately worth US$139.8 billion in 2015 and has tremendous growth potential owing to recent government policies aimed at increasing highway and road infrastructure, promoting Indian manufacturing, creating dedicated freight corridors, establishing smart cities and other developmental and welfare activities to feed and shape the beast we live in.

Present Situation

For eight days in a row since May 14, prices for petrol and diesel have been on the uptick in India as retailers pass on rising global oil prices to consumers without a breath of mercy. Government-owned oil companies, which largely control the fuel market, resumed price hikes after a 19-day pause that ended with the recently-concluded Karnataka assembly elections, which was somehow expected already, has made the general public more aggressively inquisitive.

The price of petrol in the capital as of today (17th June 2018) is Rs.76.35/- Per Litre and that of diesel is Rs.67.78/- Per Litre and beware, the hikes may not be over yet as the financial stress is piling on both the government and oil firms with the boundaries growing close to the pitch every moment, keeping in mind the upcoming general elections.

In 2015, India was the fourth largest consumer of crude oil and petroleum products after the United States, China, and Japan. Despite having good fossil fuel resources, India increasingly depends on crude oil imports to meet its mammoth domestic energy demands. Currently, about 80% of India's crude oil is imported from overseas - Abu Dhabi, U.S.A, Venezuela, Etc.

India's crude oil imports during the fiscal year 2015 to 2016 increased to 202.1 million tonnes (compared to 189.4 million tonnes during 2014 to 2015). Saudi Arabia is India's largest oil supplier, with a 20% share of India's crude oil imports. In total, around 58% of India's imported crude oil came from the Middle East, 19% from Africa and 18% fromVenezuela(Mostly). Following the lifting of sanctions against Iran by the United States in January 2016, even India's crude oil imports from there are likely to increase.

Despite being a net importer of crude oil, India is a net exporter of petroleum products due to significant investments in refineries designed for export, particularly in the state of Gujarat.

Factors and Laws Affecting the Fuel Prices & Who Regulates the Industry?

There are a number of factors that constitute the determination of fuel prices in India and take it to where it is currently. The two most prominent are -

1. Crude Oil Prices - Very obviously, the price at which India imports the Crude Oil (Kaccha Tel) has a role to play in determining the price at which we buy it. As of now the value of crude oil in the market is $ 86.73 / Barrel. A barrel contains 159 litres of fuel, which means that crude oil is available at about Rs.36 Per Litre. As this price rises, the prices forwarded to the consumers also rise. Now, this is where the myth, that the prices only depend on the International swings, as argued by the Government in defence after every hike, evolves into an interesting fact, that the prices of crude oil around 2013 -2014 were skyrocketing and touched almost $140 Per Barrel. The consumers in India had to pay about Rs.80 Per Litre at that time. Fair enough! However after 2014 when BJP came into power, the crude oil prices fell to a luckily soothing rate of $30 per barrel, but we kept paying around Rs.70 per litre. Do you smell the fish? The gap was covered by the taxes that the Government levied as Excise and VAT which will be explained below. As of now, due to various geological issues, the hurricanes in U.S.A, shortage in Venezuela, the prices of crude have again shot up to $86.73 per barrel and the Government has no other option than to increase the prices. But what about the other option - Reducing the price/tax ? A big No! No! as, for every 1 rupee that the government waives, it loses Rs.13,000 Crores and the Government is still not in good financial footings and thus not in a position to afford the same.

2. The Exchange Rate - Again very obviously if the value of rupee falls, the amount of crude oil bought for each rupee is lesser and thus the government has to spend more for each litre further adding to the cost. As of now the value of rupee against a dollar is 68.06, which has been on an up-tick for a long time now.

Other factors adding on to the cost of the petrol are -

3. The Cost of Refining - After paying Rs. 35 Per Litre for the crude oil, the crude oil has to be heated up to extract unleaded fuels like = Petrol, Diesel, Kerosene, etc out of it. This process is the process of refining. For each litre of crude oil, Rs.3 have to be spent in refining making the figure around Rs.38.

4. Transportation Cost - The Oil has to be transported through oil carriers through the seas and the freight charges have to be paid. The transportation costs around Rs.3 per litre making the figure around Rs.41.

5. Commission by the Dealers - The petrol pump dealers have a margin of around Rs.3 to Rs.4 per litre of the fuel which further adds to the price making it around Rs. 44 - Rs. 45 per litre.

6. Excise Duty - Here comes the undisputed 'Dominus' of the price determination machinery - The Union Government. Under the Constitution of India, 1950 ('Constitution') The Union Government has the power to legislate in respect of O&NG. Legislative powers are conferred on the Union Government under Entry 53, to List I of Schedule VII of the Constitution. The first tax levied is by the Central Government which is about Rs.21 currently. The tax on the fuels is one of the biggest sources of income for the Government to carry it's welfare and infrastructural development programmes in the countries and we are somehow obliged to pay them as we pay them for the development of our own standards of livimg. However, paying almost 50% excise on a commodity does not sound very comforting. This makes the figure to look like Rs.65 or so.

7. VAT - After the central Government, the state Governments also levy different amounts of VAT according to their requirement which is around Rs.17 currently in the states. This final tax makes the petrol available to the consumer at Rs.80-85 per litre.

So ultimately we are paying almost 107% taxes on the petrol that we buy to fuel our lives everyday.

A brief on the laws pertaining to the Industry?

The taxes and other fees and fines that we are paying on the fuel are regulated and provided by the laws created by the centre. Although in reality the laws or the head authority does not have a big say in controlling the prices, they somehow maintain the necessary responsibility on the controllers/Players to stay within the four walls of the law. Few laws that are related to the industry are -

1. Petroleum Act, 1934 - Law pertaining to the advice and assistance to the Government, Agencies and authorities connected with the industry, maintaining transparency and efficiency, develop and innovate and also to ensure that the proper standards are maintained and public safety is ensured.

2. The Petroleum Rules, 1974 - Pertaining to the rules for the new and old players of the industry and levying various fees and penalties in case of entries, renewals and other formalities.

3. The Petroleum & Natural Gas Rules, 1959 - Regulatory Framework for the Upstream Explorations. Prohibits explorations except under a license which levies heavy fees on the entrants generating revenue for the Government. Every licensee has to keep deposits and pay annual renewal fee.

4. The Oilfields (Regulation and Development) Act, 1948 - Basic enabling statute for licensing and leasing of petroleum and gas blocks by the Government. Empowers Government. to make rules for licensing and leasing the mining farms.

5. The Petroleum pipelines (Acquisition of Right of User in the land) Act, 1962 - Formulating the rules for proper and safe pipelines for the transition of fuel. These and a few more bye- laws make the whole legislation of the Petroleum and Gas Industry. These are important for us to know to understand the trends in the industry thoroughly.

This field is also a great and lucrative one for the aspiring lawyers and being thorough with these law may help him in the practice.

Now, as we are now aware of the policy of the Government. here, we all have one question - What is the solution. Should the taxes be reduced? OR Should taxes be left to swing with the decisions of ministry and flow of crude oil prices?

Criticisms

Few reasons why taxes should be reduced -

1. Because that's what people want - The people who have been affected the most due to the hikes are the middle class people of India who have always found their pockets under strike and most stressed. Reduction in the taxes would mean a call off of the discontent and desperation in the country which has been more consistent than 'RG'-memes in India.

2. Better management by citizens- Taking into consideration the present scenario of the country where corruption is the new trend, even if the Government generates baffling amounts of profit through taxes one cannot be fully assured that all of it, or even a considerable part of it, will be actually invested in and for the purpose they are levied. So if the people are allowed to manage this money it would be better spent for the welfare of their own on their own. Their disposable income will increase and the sentiments will be restored. But remind you, there will be no one to be blamed but you, in case the policy backfires at the economy!

3. To check inflation - Petrol and Diesel being the fuels that run the 95% of the country are totally justified in affecting the prices of other commodities too. Fuel is needed for transportation of goods and thus every commodity will see inflation in it's price if the taxes are not reduced and the fuel price is let to rise with the increase in the international pricing which is most likely to increase.

4. They are not justified - Paying more than 100% taxes on a commodity that the country is so dependent on and that too in a country like India, where there is a huge income gap is not at all justified. The rate of taxes here should not be blindly accepted by the people but questioned. Also due to the lack of competition, the Oil companies and Government will not be really moved as no one would be really worried about the competition.

5. This is a lazy policy - What if the price of the crude oil suddenly shoots to $100 or above again and does not decrease? Will the government sell the fuels at Rs.100 Per Litre? Or start giving subsidies again and take the burden of heavy debts?

Why should the taxes NOT be reduced?

1. The habit of misuse - we are all used to the habit of misusing what we get easily or for a cheaper price (Yes, I'm guilty too). In a country like ours where the fossils are depleting at an alarming rate and also that we are a robustly developing country and need more and more fuel to run, we need to put a check on the misuse and even use of the fuel. Levying taxes on the fuel will keep our hands gripped to our wallets and help preserving the combustible fuel. The Government should also invest more in the green technology and focus upon harnessing the renewable sources of energy.

2. It will check pollution - Less taxes would mean less price of the fuel and less price would mean more consumption which will lead to more pollution and we have already been honoured with the awards like - 'One of Most polluted countries of the world'. No more of such laurels can we afford to receive now.

3. It is a long term measure - The last Government surely did well to win the hearts and votes of the people of the country for a short while by giving subsidies on the fuel, but at what cost? The country lost a huge lump of revenue due to the same and found it's fiscal deficits in problem. After 2014 when the prices of the crude oil dropped and Modi Government raised the taxes, we generated around 99,000 Crores in the FY 2015 - 2016. We generated almost double the amounts of revenue the next year i.e - 2,42,000 Crore. It is expected that this year the revenues will be around 2,57,900 Crores. These are not the numbers to be ignored. The Governments are comparably much stable now and the fiscal conditions too. More money is now being invested in the developmental and infrastructural activities. Thus we have to decide between long term benefits or short lived happiness and polluted environment.

4. Negative balance of trade - India like many other European economies has a negative balance of trade and to check it we need to generate profit and lower the consumption in the country.

Including Fuel under GST?

This is one of the solutions out that a considerable lot of citizens are in favour of. The GST in India is 18%, which means the price of 1 litre petrol in India will drop to around Rs.48/- Per Litre to Rs.50/- Per Litre. The diesel would also cost almost the same. Sounds good! However the Government will never be in it's favour as it will result in drop in the revenue generation on fuels, from 57% currently to just 18% which will be a massive drop in the revenues and would land the Government into damps. In addition to that, again, including the commodity under the sphere of GST would also mean misuse and pollution too. Other than that the government may even consider reducing the taxes by about 50% which will still generate about 25% revenue on every litre that is around Rs.10/- , which would bring the fuels to Rs.54/- to Rs.58/- roughly. This would be a win-win situation for both the Government and the people of the country.

The choice is ours - Long term benefits and Healthy Environment for our coming generations OR Short term comfort and degradation of the environment.

Post your opinion regarding the solution to the issue and amendment of laws in the comments section below.