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Why do fuel prices vary across different petrol pumps in India?

Friday, 8 August 2014 - 7:00am IST | Place: Mumbai | Agency: dna

As states governments add layers of taxes on fuel, disparity in petrol and diesel prices across the country has reached as high as 35%, spawning a new mafia that profits by sourcing cheap and selling high

Ever wondered why you have to shell more if you refill at a petrol pump in Thane, just a few kilometers away from your regular fuel station in Navi Mumbai. Or why the fuel costs less outside city limits.

Well, if you thought differential of a few bucks across suburbs was too high, here's a shocker: it is way too high, as much as almost 35%, when compared among states, and is widening with every price increase.

This is because some state governments are adding multitude of taxes and levies on oil.

This difference has also led the rise of unscrupulous elements who are making a killing by selling fuel in some states by sourcing it cheap from nearby states where they cost less.

Consumers in Pune, for instance, are paying Rs 81.07 per a litre for petrol (highest in the country) as compared with Rs 59.96 per litre (lowest in the country) in Goa-Panjim, mainly due to multiple layers of taxes like sales tax, value added tax (VAT), cess, state-specific charges (SSC), local body tax (LBT), entry tax and cess.

In case of diesel, consumers in Maharashtra are shelling out the highest -- Rs 67.99/litre in Thane, at Rs 66.51 per litre in Mumbai, Rs 66.49 in Pune as compared with Rs 56.72 in Haryana-Ambala and Rs 56.75 in Punjab-Jalandhar.

In Navi Mumbai and Thane, dealers pay three different kind of taxes over and above normal sales tax and VAT, which include, LBT, export LBT and additional VAT.

Petro dealers up in arms
This maze of taxes has led to petroleum dealers across the country fighting for uniform tax structures and inclusion of petrol and diesel under Goods and Services Tax (GST).

According to Ashok Badhwar, president of Federation of All India Petroleum dealers (FAIPT), Karnataka has the highest sales tax in the country on petrol and diesel, followed by Maharashtra and Tamil Nadu.

"Mafia is making all the money in such states as they procure fuel from states like Goa for a cheaper price and sell these states. Dealers are losing money big time. The investments are also high for a dealer if the fuel is expensive in a state," he said (see table for effective tax rate on diesel, petrol). Effective rates of sales tax and VAT on petrol are quite high in Punjab, Karnataka, Andhra Pradesh, Madhya Pradesh and Maharashtra," says Badhwar.

"We made a representation with the previous government but nothing really happened. We plan to meet the current minister after August 14," he said.

Several states have, however, opposed inclusion of these fuels under GST.

"Finance ministers of all states want liberty of charging VAT on petrol and diesel as per their wish. States are opposing GST mainly because they know this tax would directly go to central government's kitty rather than their accounts," Uday Lodh, president of Federation of All Maharashtra Petrol Dealers Association (FAMPEDA), told dna.

FAMPEDA has, in fact, announced that petroleum dealers across Maharashtra except Mumbai would go on one-day strike on August 11 to press for a "One Maharashtra One Tax" regime. Lodh said the disparity in taxes between states, cities and outside the city limits was making their trade economically unviable.

"Around 1,000 petrol pumps on the state boarder are not able to sell anything. If tax rates are brought at par, shifted sale would come back to the state," Lodh added.

Transporters hit too
Higher fuel cost is also impacting truck operator margins.

"Diesel price constitute around 60% of the overall operational cost for a transporter. Hence, transporters are currently facing financial challenges owing to increasing volatility on diesel, while freight rates have remained unchanged due to slow demand in the market," said Amritlal Madan, vice-president, All India Motor Transport Congress. He said truckers generally prefer refuelling in states like Madhya Pradesh or Gujarat instead of a state like Maharashtra where diesel costs are the highest.

FAMPEDA has also appealed to the state government to abolish State Specific Charge (SSC) or reduce VAT by 3% to bring prices at par with neighbouring states.

Local taxes galore
The government introduced the SSC scheme in July 2012 to allow the public sector oil marketing companies to recover the extra amount they incurred as entry tax, octroi and input tax restrictions on VAT in certain states.

These local taxes came in addition to the sales tax and excise duty imposed by the state governments. The levies incurred by oil marketing companies are irrecoverable without the help of SSC scheme.

"Mumbai Municipality charges 3% octroi on crude, making raw material costlier for city refineries in comparison to other states. However, other states do not want to bear this additional burden, and hence this cost is recovered from Maharashtra itself. OMC are not even able to completely recover this cost as it can be applied on only specific kind of fuels," B K Namdeo, refinery director of HPCL, said.

In Mumbai, Brihanmumbai Municipal Corporation (BMC) collects around Rs 2,500 crore as octroi on crude. Besides, twenty five municipal corporations are levying LBT at the rate of 2% to 5%, making auto fuels even more costlier within cities, Lodh said. In July, the Ministry of Petroleum and Natural Gas declared that the upward revision in Retail Selling Price (RSP) of domestic LPG and kerosene distributed through Public Distribution System (PDS) would be put on hold until the government holds a discussion on State Specific Costs (SSC).

Namdeo believes that the government may not look at removing SSC in case of petrol and diesel as these are not as high as sales tax and VAT rates in different states.

What's the solution?
Most experts dna spoke to agreed that either abolition of tax levies by states or uniform tax structure for fuels can bring price parity in auto fuels across the country. However, crude petroleum, natural gas, some petroleum products, and electricity have been kept electricity outside the purview of GST as per the suggestions of the Empowered Committee of State Finance Ministers, 2009.

According to National Institute of Public Finance and Policy, if crude petroleum, natural gas, petrol, diesel, aviation turbine fuel and electricity are kept out of GST, it would lead to cascading effect in prices of other essential commodities.

"Since petroleum products play an important role in India's energy use, and are used directly and/or indirectly as inputs in most sectors, the proposed design would result in cascading in sectors of the economy," the institute said in a report authored by Sacchidananda Mukherjee and R Kavita Rao.

GST reforms implemented alongside decontrolling product prices will erase worries about a potential price rise, said the report.

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