The recent hike in petrol and diesel prices across the country by Rs 3 per liter has sparked an old controversy. As of May 15, petrol in Delhi was priced at Rs 97.77 per liter while people in Assam were paying Rs 101 for the same oil.
India imports crude oil centrally and its quality is same in all cities. So the question is why the people of Assam, West Bengal or Mumbai have to pay so much more than Delhi? The real answer lies in our country’s tax system.
There are different levels of retail pricing of petrol or diesel. Transport cost, dealer commission and central government excise duty are added to the actual price of oil. Till this point, oil prices have remained almost the same in all cities of the country. But the game changes when state governments add VAT or Value Added Tax. Fuel products are not yet subject to GST Therefore, each state government can levy tax at its discretion. Oil is cheap in Delhi as VAT on fuel is historically low. In contrast, VAT and tax rates are much higher in states like Assam, West Bengal or Maharashtra. This is exactly why oil prices in Assam have gone up by Rs 101 after the recent price hike.
Many believe that the difference is likely due to the transportation costs involved in getting the oil from the refinery to the pump. While this is true to some extent, this cost is negligible compared to state taxes. For example, even though Mumbai has its own refinery, the price of oil there is much higher than in Delhi. Again, due to lower VAT in remote locations like Port Blair, oil prices are often lower than on the mainland. Also, the rise in Brent crude prices due to the ongoing tension between the US and Iran in the global market also affects our country as India has to buy more than 80 percent of its oil needs from abroad. Union Petroleum Minister Hardeep Singh Puri, however, assured that there will be no shortage of oil in the country, but this is expected to be the biggest price hike.
Now the question is why can’t the price of oil be made the same in all cities? Many economists are suggesting bringing energy under GST but state governments are not ready for it. VAT on petrol and diesel is one of the major sources of revenue for the state government. This tax covers various development projects starting from road construction. State governments will lose the power to levy this tax if energy comes under GST So unless the center and the states agree on this, the oil price will change only if the borders of the map of India change. And people of states like Assam will be forced to pay more than Delhi to buy oil.