Taxes now make up 70 per cent of fuel retail prices

Mumbai / New Delhi: Taxes now comprise up to 70% of retail prices of petrol and diesel in the country after Tuesday’s duty hike by the central government that cut oil companies’ record-high fuel marketing margin by three-fourths.

Central and state governments, starved of revenue due to a nationwide lockdown, are increasingly resorting to fuel tax hikes to capture most gains from a global oil crash that began early March, leaving little benefits to the consumers.

A central excise duty hike of Rs 10 per litre on petrol and Rs 13 per litre on diesel along with an increase in value-added tax by the Delhi government on Tuesday took the share of taxes in retail prices to 70% in the national capital.

The share of tax would vary in other states according to the local taxes.

Additional duties imposed by the Centre on Tuesday didn’t raise retail prices in the country as fuel retailing companies adjusted it against their own margins that had expanded to a record high. An excise duty hike of Rs 3 per litre in mid-March had also left retail prices unaffected.

This is because the central government first allows state-controlled oil marketing companies to inflate marketing margins and then get them to absorb the duty hike, obviating any need for retail price changes.

“This is a political thing. It helps the government avoid any direct blame for higher consumer prices,” an industry executive told ET.

Oil companies are expected to daily revise domestic fuel prices after factoring in the international rates and the exchange rate but had kept the rates it frozen for more than a month even as crude oil prices have fallen 41% since the beginning of March.

In Delhi, diesel retail prices have increased 7.5% since early March despite its international price falling 45% during the same period. Petrol price is down just 1% in Delhi against 37% drop in international rates.

STOCKS DOWNGRADED

Absorption of the latest duty hike by oil marketing companies has cut their net fuel marketing margins from Rs 14.5-16.5 per litre on Tuesday to Rs 2.3- 4.4 per litre on Wednesday, according to ICICI Securities, which has downgraded stock rating of these companies to ‘Hold’ from ‘Buy’.

The brokerage has cut FY21E EPS of state-owned Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation by 10-27% and target price by 16-34%.

Marketing margins—money earned by selling every litre on fuel at the station by the oil marketing companies—account for up to two-thirds of the operating profit of these companies. Every 50 paise change in the marketing margins could impact projected earnings in the range of 11-21%.

The reliance on income from the marketing of fuel is the highest for HPCL, followed by BPCL and Indian Oil.

The benefit of record marketing margins has helped companies partly offset earnings pressure from lower sales volume and inventory loss.

Every one rupee excise duty hike in the petrol and diesel result in incremental revenue of Rs 13,000-14,000 crore per annum for the Union government. The new hike could translate into additional tax collection of around Rs 1.5-1.6 lakh crore. The government has budgeted for excise duty collection of Rs 2.67 lakh crore in the current fiscal year, which is equivalent of 16.32% of the total tax revenue.

The impact of the benefit of excise duty hike will be lower in the absolute term in the current fiscal following sharp decline in fuel sales due to nationwide lockdown. Petrol and diesel sales by state refiners dropped by a record 61% and 56.5%, respectively, in April from a year earlier.

The petroleum sector has been one of the large contributors to the state exchequer. The combined tax contribution of the petroleum sector was Rs 3.48 lakh crore and Rs 2.27 lakh crore for the central government and state government respectively, according to data from the oil ministry. Total collection from the petroleum sector to the exchequer grew 14.3% annually to Rs 5.75 lakh crore between FY15 and FY19.