Not far enough

While the details of the proposals made by the Ashok Lahiri panel, set up to recommend a duty structure for the oil sector, are not yet out, reports suggest the idea is to halve import duties on crude from the present 10 per cent and to keep the current levels of duty differentials for various petroleum products.

In other words, reduce the import duty on petrol and diesel to 10 per cent from the current 15 per cent, that on naphtha to 5 per cent from the current 10 per cent, and on fuel oils to 15 per cent from the current 20 per cent.

The duties on LPG and kerosene will be eliminated, in place of the current 5 per cent.

There is also a proposal to move from an ad valorem excise duty structure to a specific duty structure to cushion the impact of sharp changes in global oil prices.

If the reports are correct, the proposals don’t go far enough, and are populist. It makes no sense to retain negative import protection on kerosene and LPG.

If the idea is to have a subsidy since both fuels are used by the middle classes, the Budget should do so in an open manner instead of asking oil refiners to bear the burden.

As for the differential between import duties on inputs and outputs, Dr Lahiri should know that the effective protection is many times more than what appears on paper.

Under the prevailing duty structure, with a 10 per cent import duty on crude and a 15 per cent duty on petroleum products like petrol and diesel, refineries get 35 per cent effective protection, assuming the value addition involved from converting crude into petroleum products is around 20 per cent.

This ensures that the refineries have no reason to become more efficient and ensures that consumers have to pay a needlessly higher price.

Dr Lahiri suggests that the effective protection for refineries be lowered a bit, but still kept at a high enough 30 per cent, which is what the 5 per cent duty on crude and 10 per cent duty on products like diesel and petrol translate into.

While the idea of a specific excise duty for petroleum products is influenced by the need to contain prices, a specific duty is an anomaly in modern tax terms, which demand that the exchequer benefit from a natural hike in prices, or incomes in the case of income tax.

Since the idea is to prevent the government from undue profiteering from global price spikes, a better idea would be to continue with ad valorem duties up to a certain price band, after which a specific duty gets triggered.

For instance, the government could have an ad valorem duty of 25 per cent till a crude price of $30, after which the duty should get converted into a specific one of $7.5 per barrel.

That way, import duties would have natural buoyancy and the purpose of tempering price hikes would also be served.