Dr. C Rangarajan Committee Report

Dr. C Rangarajan Committee Report

1. 
   The Government on 26th October 2005 had set up a committee to look into the various aspects of pricing and taxation of petroleum products with a view to stabilizing/rationalizing their prices, keeping in view the financial position of the oil companies, conserving petroleum products, and establishing a transparent mechanism for autonomous adjustment of prices by the oil companies. Based on the deliberations in the meetings, the following three areas were identified by the committee for detailed study in order to meet the objectives set out in the terms of reference:
   

• 
  Alternative models for pricing of petroleum products;
  
• 
  Taxes and duties on crude oil and petroleum products;
  
• 
  Subsidies on PDS kerosene and domestic LPG.
  

1. 
   The recommendations made by the committee can be divided broadly into three groups. The first set of recommendations relating to pricing of petrol and diesel are the following:
   

1. 
   Shift to a trade parity pricing formula for determining refinery gate as well as retail prices;
   
2. 
   Government to keep at arms length from price determination and to allow flexibility to oil companies to fix the retail price under the proposed formula; and
   
3. 
   Reduce effective protection by lowering the customs duty on petrol and diesel to 7.5 percent.
   

1. 
   This set of recommendations should be implemented as an integrated package as selective implementation will create more distortions.
   
2. 
   The second set of recommendations relates to pricing of domestic LPG and PDS kerosene, viz:
   

1. 
   Restrict subsidized kerosene to BPL families only;
   
2. 
   Raise the price of domestic LPG by Rs. 75/cylinder;
   
3. 
   Discontinue the practice of asking ONGC/GAIL/OIL to provide upstream assistance, but instead collecting their contribution by raising the OIDB cess from the present level of Rs. 1,800/MT to Rs. 4,800/MT; and
   
4. 
   Government to meet the balance cost of subsidy from the budget. The ‘PDS Kerosene and Domestic LPG Scheme 2002’ will have to be suitably amended for this purpose.
   

5. 
   This set of recommendations should also be implemented as an integrated package as partial implementation will not yield sustainable results.
   
6. 
   The third set of recommendations relates to restructuring of excise duties from the present mix of specific and ad-valorem to a pure specific levy and calibrating the levies at Rs. 5.00 per litre for diesel and Rs. 14.75 per litre for petrol.
   
7. 
   The Government has accepted the following major recommendations of Dr. Rangarajan Committee.
   

• 
  Pricing formula for Petrol and Diesel has been changed to trade parity which would be a weighted average of the import parity and export parity prices in the ratio of 80:20
  
• 
  Principle of trade parity pricing will apply for the refinery gate price as well as for determining the retail price.
  
• 
  The relative weights of exports and imports in estimating the trade parity price will be reviewed and updated every year.
  
• 
  The Government has moved towards providing flexibility to oil companies to fix retail prices autonomously. However, the current international scenario is not conducive to pricing freedom with oil prices recording historical high every successive month. The Government is committed to provide full freedom when international prices stabilize.
  

• 
  Custom duties on petrol and diesel have been reduced to 7.5 percent from 10 percent.
  
• 
  Customs duty on crude has been retained at 5 percent.
  
• 
  Customs duty on industrial products other than petrol and diesel may be retained at 10 percent in order to protect domestic producers who suffer sales tax as compared to direct importers.
  

• 
  The Government has decided to share the burden of not making full adjustment in domestic retail prices due to high oil prices through the principle of equitable burden sharing wherein Rs 28,300 crore would be borne in the form of oil bonds during 2006-07.
  

• 
  The Government has accepted in principle to restrict supply of PDS kerosene to BPL households.
  
• 
  In computing the quantum of subsidy entitlement of states on PDS kerosene, BPL households’ estimates of the Planning Commission will be used and a uniform criteria and estimation methodology will be applied.
  

8. 
   Some of the recommendations have been found non-implementable in the current scenario of abnormally high prices. Freight equalisation has been continued for the present. Besides full price increases required have not been passed through in periods of volatile international prices. Rationalization of excise duty and sales taxes remains. Further the differential in retail prices is being equitably shared rather than met fully from the fiscal budget in a transparent manner.
   

9. 
   Adjusting excise duties to a higher or a lower level has arguments on both sides. Those proposing higher level of duties have argued that prices of the petrol and diesel need to be consciously kept high to provide appropriate price signal to the consumers. India being oil import dependent, we need not encourage consumption. At the same time, funds collected through excise can be utilized to meet funding for social schemes.
   
10. 
    The counter argument has been that lower taxation will reduce the burden of the consumers. A country like India needs to strike a balance between diverse objectives. Taxation on subsidised products is already minimal with no excise duty on PDS Kerosene and domestic LPG. Consumption of these products is restrained through allocations and lower new connections. In case of petrol and diesel, there is no restraint on consumption except may be indirectly through higher prices. Therefore, as far as excise duty on petrol and diesel is concerned, there is merit in high taxation. Similar practice is followed across Europe by developed countries.
    
11. 
    As regards, advalorem components in excise duty, an 8 percent rate does not appear excessive though it does compound price increases to a certain extent. From the taxation point of view, it is necessary to maintain price as well as quantity buoyancy.
    
12. 
    Rangarajan Committee has pointed out that large disparity between excise duties of petrol and diesel needs to be rectified. This is contrary to the global trend where the excise levies on both products are more or less equal. Indeed, in some countries, diesel is costlier than petrol. The contrarian trend in our economy leads to inefficient substitution of one fuel for another.
    
13. 
    Though, in principle, high taxation can be supported it is necessary to realign taxes between transportation fuels – petrol, diesel and ATF keeping in mind the ability of the consumers to shoulder the burden. The current excise duties along with its consumers is indicated in the table below:
    

Table 5.1: Current Excise Duties on Petrol, Diesel
Transportation Fuel	Excise Duty6	Consumers
Petrol	Rs.13/Ltr + 8 percent (Rs 15.18/litre)	Mainly owners of two wheelers and cars
Diesel	Rs.3.25/Ltr. + 8 percent (Rs 5.20/litre)	Trucks, public transport, railways and farmers
ATF	8 percent (Rs 2.66/litre)	Airline travellers

14. 
    It may be seen that the current policy seems to favour airline travellers who perhaps can afford higher taxation in contrast to people who travel by buses in public transport or on rail. Clearly, there is a case to realign excise duty considering the consumers. ATF could be taxed at the highest level with petrol being taxed at a lower level. Diesel being the lifeline of commerce should attract moderate taxation, but the least of the three transportation fuels.
    

15. 
    Rangarajan Committee observes that sales tax collection from oil sector have consistently been contributing to a third or more of the total sales tax collections of the states thereby burdening the consumers as well as building an undesirable dependency at the state level too for revenues on a single sector. Further, heavy sales tax levies lead to a high degree of cascading. The Empowered Committee of State Finance Ministers deliberating on the implementation of VAT should also be entrusted with the task of evolving a uniform policy on sales tax levies on petroleum products.
    
16. 
    Further, on irrecoverable local taxes, the best solution would be to persuade the concerned Sate Governments/local bodies to withdraw such levies in view of their distortionary impact. Alternatively, the State Governments/local bodies may be encouraged to replace the entry tax/octroi by a surcharge on sales tax on finished petroleum products. The State Government can compensate the local body out of the surcharge it collects. However it has been reiterated that the most desirable option is to eliminate all such duties.
    
17. 
    The Ministry agrees with the observations and recommendation of the Rangarajan Committee, that the state tax⁷ rationalization is an urgent need. Though, most states have adopted VAT, there is no uniformity amongst the tax rates and procedures between various States. In addition, taxes from local bodies distort the playing field. Government may bring pressure on the States to eliminate irrecoverable taxes such as octroi and entry taxes and if required convert these taxes to recoverable taxes.
    
18. 
    At a time when the country is entering into Free Trade Agreements (FTAs) with different countries to form a larger market, it is ironical that we have a fragmented market within the country. It is absolutely essential to have a common market for oil products based on VAT throughout the country. VAT should provide set-off for local taxation such as entry tax and octroi, in case these taxes are not eliminated.
    
19. 
    The lasting solution lies in implementing a unified Goods and Services Tax (GST) across the country on petroleum products. The Government has already announced their intent to put in place a GST structure by 2010. It is hoped that GST would cover the full gamut of taxes and provide set-off for taxes, including service tax, on inputs whether at the municipal level, state level or central level while placing imports at par with domestic production.
    

20. 
    The subsidy for domestic cooking gas should be phased out gradually or at least substantially reduced. As recommended by the Rangarajan Committee, a one-time upward adjustment in the price of domestic LPG by Rs.75 per cylinder may be made. Beyond this one time increase, it is necessary to gradually increase the price of domestic LPG so that the retail price adjusts completely to the market level eliminating the subsidy altogether as early as possible. Strong political consensus is needed for implementing the same.
    

1. 
   The observation that the only fool proof mechanism for preventing leakages and diversion is to move towards a system of a single price at the point of retail sale for all consumers with the subsidy being passed on to BPL consumers through alternative mechanisms. We may explore methods to provide direct subsidy amount to the consumers, with full price applicable at the retail point.
   
2. 
   Further in view of the enhanced programme for rural electrification (Rajiv Gandhi Grameen Vidyuthikaran Yojana), the need for subsidizing kerosene over the medium term needs to be reviewed.
   
1. 
   
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