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Fuel prices: India vis-a-vis the others - Views on News from Equitymaster
 
 
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  • Feb 14, 2007

    Fuel prices: India vis-a-vis the others

    In the previous article, Petrol: What are we paying for?, we had a look at the different components that make up the domestic petrol prices. It was revealed that basic costs form only 48% of the selling price of the petrol and the remaining 52% was accounted for by taxes. Does this mean that the government is charging us unfair prices? We will try to resolve this question by comparing the tax component of the domestic transport fuel prices (petrol and diesel) vis-a-vis the quantum of tax component that currently prevails in some of the other nations.

    For the purpose of comparison, we have taken developed countries from Europe such as France, Germany, Italy, Spain and UK. We have also compared the prices with the Asian giant Japan. Any comparison will be incomplete without considering the US, the biggest guzzler of transport fuels in the world and hence it is also included in our study.

    What is the tax component in petrol prices globally?

    The table below provides a break-up of the selling prices of petrol across different countries. Tax component in the retail prices of petrol in the European countries average around 65%. Japan has 44% of its end prices as taxes, while the same for Canada and US is 34% and 18% respectively.

    Tax component of petrol prices in various countries...
    Country Ex tax petrol prices Total prices Tax component % Tax component
    France 0.48 1.48 1.0 67.6%
    Germany 0.48 1.53 1.1 68.6%
    Italy 0.58 1.57 1.0 63.1%
    Spain 0.53 1.21 0.7 56.2%
    UK 0.49 1.63 1.1 69.9%
    Japan 0.65 1.17 0.5 44.4%
    Canada 0.51 0.78 0.3 34.6%
    USA 0.48 0.59 0.1 18.6%
    India 0.48 1.00 0.5 52.0%
    * Prices in US$ per litre.
    ** Prices of other countries based on IEA data (November 06)
    *** Indian price is price in Delhi as on 31.11.2006 (1 US$ = 45 Rs).

    The table reveals the fact that the tax component as a percentage of domestic petrol prices is in sync with the sample average of 53%. The Canadian government with wider tax nets mops up as much as 64% of its total revenues from the income taxes. US too has major source of its revenues from the direct tax. In comparison, India not only witnesses significant direct tax evasion but the percentage of direct tax payers, as a percentage of total population is also very low. This compels the government to resort to indirect taxes to meet its revenue targets. The scene, even on the indirect taxes front is not something to write home about, as excise duty evasion (excluding petroleum products) is also on the higher side.

    And now, something about diesel...

    India is a diesel economy as diesel forms a major part of the consumption of petroleum products. Here too, the taxes embedded in the ultimate selling prices are lower compared to other countries in percentage terms.

    The table below shows the tax component of the diesel prices in India vis-a-vis other countries. Taxes on diesel in other countries is lower as compared to that on petrol due to it being a primary transport fuel and hence more sensitive to inflation. The average for the countries listed below is 45%. Just like other countries, India, has lower taxes (30%) on diesel than petrol and here too, the tax component is lower than other countries. This could be attributed to usage of diesel in the agriculture sector in addition to its use as a primary transport fuel.

    Tax component of diesel prices in various countries...
    Country Ex tax petrol prices Total prices Tax component % Tax component
    France 0.57 1.32 0.8 56.8%
    Germany 0.57 1.36 0.8 58.1%
    Italy 0.66 1.43 0.8 53.8%
    Spain 0.62 1.15 0.5 46.1%
    UK 0.58 1.74 1.2 66.7%
    Japan 0.66 0.98 0.3 32.7%
    Canada 0.59 0.79 0.2 25.3%
    USA 0.55 0.67 0.1 17.9%
    India 0.48 0.69 0.2 30.4%
    * Prices in US$ per litre.
    ** Prices of other countries based on IEA data (November 06)
    *** Indian price is price in Delhi as on 31.11.2006 (1 US$ = 45 Rs).

    Conclusion

    As we have seen, the tax component in the prices of petrol in India is more or less in line with global trends, while the same for diesel is lower. This is despite the fact that the other countries have much wider tax nets. Hence, the argument that duties on these products be further reduced does not hold much water, if one were to think of it rationally. On the other hand, given the politically sensitive nature of the issue, we believe the government will have to absorb most of the price inflation by way of direct or indirect subsidies. The only way out of the current quagmire seems to be prudent fiscal spending on the part of the government and sustained efforts towards bringing more people into the tax net, which currently is at abysmally low level.

     

     

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