The govt has captured most of the benefits of falling oil prices

Nov 18, 2015

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One good news for the Indian economy during this financial year has been the huge increase in indirect tax collections. Customs duty, excise duty and service tax together form the indirect taxes collected by the central government.

Data released by the ministry of finance earlier this month showed that indirect taxes as a whole have grown by close to 36%, during the course of this financial year (April to October 2015). The accompanying table provides a breakup of the different kinds of indirect taxes collected during the course of this financial year.

Indirect Tax Collection: April- October 2015
(Rs. in crores)
Tax
Head
B.E.
2015-16
For October Up-to October % of BE achievement
2014-15 2015-16 % Growth 2014-15 2015-16 % Growth
Customs 208,336 16,800 18,998 13.1 104,831 122,448 16.8 58.8
Central
Excise*
228,157 13,569 22,550 66.2 87,588 147,685 68.6 64.7
Service
Tax
209,774 12,528 17,143 36.8 89,379 112,727 26.1 53.7
Total 646,267 42,897 58,691 36.8 281,798 382,860 35.9 59.2

*Exclusive of cess administered by other departments.

What is interesting is that customs duty, central excise duty as well as service tax collected have grown at very good rates. The increase in the collection of indirect taxes between the end of 2013-2014 and the end of 2014-2015 had been just 9.1%. Also, the government failed to meet the indirect tax target of Rs 6,24,902 crore in 2014-2015. It managed to collect only Rs 5,42,325 crore.

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Also, the indirect taxes collected during the course of this year up until now indicate that the government seems all set to meet its target of Rs 6,48,418 crore. This target is an increase of 19.6% in comparison to the indirect taxes collected during the last financial year. Given that the indirect taxes collected have grown by 35.9% this year, meeting the indirect taxes target for this year, should not be a problem at all. As finance minister Arun Jaitley said earlier this month: "One of the greatest positives I can see is a huge increase in indirect tax revenues."

The question is how genuine and sustainable is this massive growth in indirect taxes. As the ministry of finance press release put out earlier this month points out: "These collections reflect in part increase due to additional measures taken by the Government from time to time, including the excise increases on diesel and petrol, the increase in clean energy cess, the withdrawal of exemptions for motor vehicles, capital goods and consumer durables, and from June 2015, the increase in Service Tax rates from 12.36% to 14%. However, stripped of all these additional measures, indirect tax collections increased by 11.6% during April-October 2015 as compared to April-October 2014."

Once we take these factors into account the rise in indirect tax collections is a much muted 11.6%. To be honest, the finance minister Jaitley acknowledged this recently. The 68.6% jump in central excise duty is the main reason behind the massive jump in indirect tax collections. In fact, the jump in excise duty makes up for close to 60% of the overall jump in the indirect taxes collected this year.

This jump has primarily come due to the government increasing the excise duty on petrol and diesel five times between last year and now. In fact, the latest increase in excise duty on petrol and diesel came about earlier this month.

With these increases in excise duty on petrol and diesel, the government has more or less fully captured the fall in oil prices for itself, and not passed it on to you and me. A litre of petrol currently costs Rs 68.13 per litre in Mumbai. It was at Rs 80 per litre around the time, Narendra Modi was elected to power in May last year.

Between then and now, the petrol price has fallen by just 17.4%. In comparison, the price of the Indian basket of crude oil has crashed by 63%. On May 26, 2014, when Narendra Modi was sworn-in as the prime minister of India, the price of the Indian basket of crude oil was $108.05 per barrel. On November 16, 2015, the price was at $39.89 per barrel. This clearly shows that the government has captured almost all the benefit of falling oil prices. A 63% fall in the price of oil has led to just a 17% fall in the price of petrol in Mumbai.

There are multiple problems with this approach.

The government talks about having dismantled the administered price mechanism on the pricing of petrol and diesel. But that is clearly not the case. A fall in oil prices does not immediately lead to a fall in petrol and diesel prices. The government has captured the fall by increasing the excise duty on petrol and diesel.

Further, the government has become heavily dependent on the revenue coming in from an increase in excise duty on petrol and diesel. What will it do if and when the oil price starts to go up? Will it cut the excise duty in order to ensure that price of petrol and diesel does not rise? Given that it did not pass on the benefits of a fall in the price of oil to the end consumer, isn't it only fair that it shouldn't be passing on the increase as well?

Also, it is worth remembering here that trying to forecast the price of oil remains tricky business. As Philip Tetlock and Dan Gardner write in Superforecasting-The Art and Science of Prediction: Take the price of oil, long a graveyard topic for forecasting reputations. The number of factors that can drive the price up or down is huge-from frackers in the United States to jihadists in Libya to battery designers in Silicon Valley-and the number of factors that can influence those factors is even bigger."

Further, if it cuts the excise duty, as and when the oil price goes up, it will have to borrow more and that will create its own set of problems. The fiddling around with excise duty on petrol and diesel, shows a lack of a stable policy on the tax front. The finance minister Arun Jaitley has often outside India talked about a stable tax regime for foreign investing in India.

Why forget us Indians, who live in India?

Another impact of this massive increase in indirect tax collections has been the junking of the disinvestment programme, though no politician will admit to the same. At the beginning of the year, the government had set a disinvestment target of Rs 69,500 crore. But that is not going to be achieved. Meanwhile, the government will continue to waste the taxpayer's hard earned money on dud companies like MTNL and Air India. Minimum government and maximum governance will continue to remain a slogan.

On the good side, the fiscal deficit number will look better than 3.9% of GDP it was projected at, in the budget document.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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4 Responses to "The govt has captured most of the benefits of falling oil prices"

jignesh

Nov 18, 2015

Sir
tell me one thing, why is that you are behind govt left and right. why is that you are finding all the negatives of the govt. I dont understand what the hell would you do if as a Finance Minister yourself would you not take the benefit of something like oil prices to lessen the gap of fiscal and revenue deficit then what would you really do answer this truly to your own self and to nobody.

I feel sorry to see biased in all front and just been criticizing end with good command over your language.
I am not any pro BJP or pro Modi or any parties but pro about somebody doing the good work and educated people like you just being so blind about it

Regards
Jignesh

Like (2)

vidhata

Nov 18, 2015

Unless you are being sarcastic, high indirect taxes don't make much sense, at least to me. The poor suffers when the indirect taxes are increased. Indirect taxes, at some point, affect spending decisions of people. In my view, the task is not only to raise revenue; but to collect more revenue from income earned by the individuals and corporations. It is always better to have a situation where higher incomes are adding to higher tax collections. Poor will become poorer with high indirect taxes.

If the Government or any proponent of higher indirect taxes feels they are justified because collecting direct taxes is difficult; the approach is highly flawed. If you can hide your income (and pay lower taxes); you can hide your production (and avoid all indirect taxes).

I think this is high time to lower tax slabs and make 15% as the maximum tax bracket (5%, 10% and 15% for individuals). I am sure the number of people paying taxes will jump substantially.

Start taxing agriculture income (the Government may collect taxes only where income of the farmer exceeds Rs 10 lakh, to keep out poor and the marginal farmers from the impact)

Do away with the system of TDS; improve the system of tax collection.

Last, cut indirect taxes heavily, let demand for goods grow, let companies earn more profits and let individuals have more money in their hands.

Unfortunately, I am pessimistic about all these possibilities.

Like (2)

Rajanikanta Verma

Nov 18, 2015

There are far too many petrol-driven and diesel-driven vehicles on the road. We just do not have enough driving space and parking space. Increasing the duty on petrol and duty is the right thing to do- to discourage the use of such vehicles. If the fall in the price of crude had been passed on in its entirety then our roads would have been even more cluttered.

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Glenn Rego

Nov 18, 2015

Not passing on the full benefit of falling crude prices by the government to the general public may work as a sort of shock absorber when international prices do rise provided the exise duty rates are eased slowly so as to have some sort of stability / predictability regarding domestic rates for fuel. People have learned to live with relatively higher prices and would prefer stality to wild swings, especially in the upward direction. In a country like ours, even if the prices were reduced by the government, the trickle down effect is barely noticible in the cost of transportation or the prices of fuits and vegetables in our cities. Have'nt seen autorickshaw fares come down anytime!

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