TOPIC: General Studies 2
- Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
Reforming fuel prices
The sharp increase in petrol and diesel prices has caused furore. Prices of these fuels in India had increased due to a sharp rise in their international prices. When the price of crude oil has halved since mid-2014, critics ask, why does petrol and diesel today cost almost the same as in mid-2014. They point out that when the crude oil rout was underway, the governments, central and State, instead of passing on the benefit to consumers, chose to pocket most of the gains through regular hikes in excise duty and VAT. And now, despite rise in prices, the Government is holding on to these high taxes instead of cutting them and giving relief to consumers. The consumer price of oil remains the same as it was when the crude price was twice as high.
Pricing mechanism flaw
In India, the prices of petrol and diesel are not determined by the actual costs incurred by refiners on crude oil sourcing, refining and marketing and allowing for profits. Rather, a formula — trade parity price (TPP) — is the starting point for pricing these products.
The TPP is determined based on prices for these products prevailing in the international market assuming that 80 per cent of the petrol and diesel is imported and 20 per cent is exported.
This legacy pricing mechanism is meant to protect the margins of the public-sector oil refiners — Indian Oil, HPCL and BPCL. It probably made some sense in the earlier days when petrol and diesel pricing were controlled, and the oil refiners suffered huge under-recoveries due to selling below the market price.
Trade Parity Pricing also gives unwarranted benefits to private sector refiners such as Reliance Industries and Essar Oil. These refiners get to sell their petrol and diesel at rates close to that of the PSU refiners in the domestic market. This, despite the superior refineries and crude sourcing abilities of private sector refiners that give them the leeway of pricing petrol and diesel competitively. Increased competition among PSU refiners will also encourage private refiners to price their products more competitively.
With the prices of these products decontrolled — petrol in 2010 and diesel in October 2014 — and made market-linked, the PSU oil companies suffer no more under-recoveries on this count.
So, continuing with the TPP to offer protection to PSU refiners no longer seems justified.
There is a need to move to a pricing model that factors costs of refiners plus margins. These refiners will likely have different cost structures, based on their crude oil sourcing, and refining capacities and operational efficiencies. They should be encouraged to price their products independently and transparently based on market principles.
Truly ‘dynamic’ fuel pricing not only means more frequent resets, but it should also translate into also true competition among fuel retailers, both public and private, based on cost efficiencies and free market pricing, to give customers more choice. Also, there is an urgent need for an empowered, independent petroleum regulator to enforce price competition in the sector. Only then can the product pricing reforms be said to be complete.
The sale price of oil is as high as it was when the crude price was twice as high. During that time, the government used to subsidise consumers; the government, OMCs and upstream public sector oil companies were bearing the losses. The level of under-recoveries (the difference between sales realisation and cost of supply — which is the subsidy to the consumers) over 2002-2003 to 2012-2013 was Rs 25,000 crore for petrol users and Rs 3,38,000 crore for diesel users.
In any case, increase in the cost of diesel or petrol does not increase the revenue of the central government as the excise duty is specific, that is, it remains at the same level in rupee terms. Excise rate on diesel is Rs 17.33 per litre and on petrol it is Rs 21.48 per litre.
- The excise duty rates can be adjusted and be made equal for both diesel and petrol. This can be done in a way that does not change the excise duty revenue of the central government. It will increase the price of diesel by two per cent and reduce the price of petrol by six per cent.
The benefits of doing this will be reduction in distortion, reduced demand for diesel, a fall in demand for diesel-driven vehicles, reduced air pollution, a fall in carcinogenic emissions and a decline in diesel imports.
- The sale prices of diesel and petrol have increased because of the very high VAT rates imposed by the states. These vary from state to state. Since the VAT rates are in percentage terms, whenever the cost of diesel or petrol increases, revenues of states go up. Thus, the states have a scope to reduce their VAT rates so that sale price of petrol and diesel can be moderated.
- Ideally, all states should have a uniform GST rate for diesel and petrol. The states insist on keeping diesel and petrol out of GST as they would suffer a huge reduction in their revenues — the tax on diesel and petrol constitutes the bulk of the revenues of many states. A mechanism needs to be developed to get the states to agree on the GST for petroleum products. Then the prices of diesel and petrol will come down dramatically.
Even if gradual, shift of these products to the GST regime is imperative to provide meaningful relief to consumers. The resultant lower prices of petrol and diesel can have a multiplier effect on economic growth.
Besides, it can solve problems being faced by oil companies on stranded input tax credit and higher costs arising from these two tax regimes not talking to each other.
The Government must explore innovative ways of providing relief to consumers and protecting its pocket at the same time. It needs to rise up to the challenge.
Connecting the dots:
- What are the issues regarding fuel pricing? How is the price mechanism of petrol, diesel still flawed and what changes must be brought to tackle the challenge of price rise?
TOPIC: General Studies 3
- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
- Inclusive growth and issues arising from it
Adopting service-based model in tax administration
While tax administration has seen some paradigm shifts both in the domain of direct and indirect taxes, the taxpayer still seems to be wanting for greater certainty and fairness in the levy, assessment and collection of taxes. This is where an internationally recognised concept such as taxpayer rights holds well even in the Indian context.
Ensuring trust between tax collector and taxpayer:
The Central government has development strategies in the form of campaigns like ‘Make in India’ and ‘Startup India’.
The recent introduction of the Goods and Services Tax (GST), which is the most significant overhaul of the taxation system in India ever, aims to achieve a unified market across the nation for the first time. The intent is to transform India into a manufacturing, investment and research and development hub and consequentially, there would also be an increase in revenue generation.
In the light of such economic aspirations, a fair balance between taxpayer rights and obligations will only ensure a higher degree of trust between the tax collector and taxpayer, thus leading to a higher tax yield.
India has seen key tax disputes ever since a similar growth-oriented road map was adopted by the government in the early 1990s.
- For instance, in order to attract investments, the government signed Double Taxation Avoidance Agreements (DTAAs) with states like Singapore and Cyprus on similar treaty terms as the India-Mauritius DTAA signed in 1983. These agreements proved to be detrimental in the long run for India. Multiple disputes relating to capital gains surfaced due to exploitation of legal loopholes in these DTAAs.
- Another example is of ‘transfer pricing’ mechanism (the rules and methods for pricing transactions between enterprises under common ownership or control), where there was little clarity with respect to international transactions between associated enterprises before April 2001. Even after the introduction of a dedicated transfer pricing segment in the Income Tax Act, the chaos could not be curtailed as the determination of arm’s length price (the price of such international transactions in open market conditions) would almost always be a contentious exercise.
- After the debacle the government had to face when it lost to Vodafone on a capital gains dispute in the Supreme Court, retrospective amendments were made to the Income Tax Act to supersede the adverse judgment of the Supreme Court in 2012, which were not limited in effect to only Vodafone but several such disputes relating to taxation of capital gains and deemed income of numerous MNCs having their interest or investments in India, directly or indirectly.
Issues with recently introduced reforms:
- The GAAR provisions have been made effective in India from April 1, 2017, and they can be considered as the latest chapter on the mismatch between taxpayer rights and obligations. Some major concerns with respect to taxpayer rights are left grossly unaddressed. A major example is the revocation of ‘presumption of innocence’ of the taxpayers. It is now a burden ab initio on these business entities to prove that their tax mitigation techniques do not qualify as ‘impermissible avoidance arrangements’. This goes against the fundamental principle of ‘innocent unless proven guilty’.
- With dual GST, the path ahead is not simple. For example, the GST Network will process billions of invoices every month, with its concomitant economic and fiscal impacts of technical glitches and other such situations. These snags will impact traders with genuine transactions, as the processing of their tax collections, input tax credit claims and tax refunds might get affected. A precedent is the GST in Malaysia which was implemented in 2015: cash crunch woes due to the delayed refunds were among the prominent grievances of the trading community.
The government has adopted a constructive approach, aiming to improve tax administration and as a result ensuring better tax compliance.
The recommendations of the Tax Administration Reform Committee, submitted to the Finance Ministry in 2014, tried to reintroduce a fair balance between the rights and obligations of taxpayers.
Several of these recommendations, such as improvement in taxpayers’ service, enhanced use of information and communication technology, exchange of information with other agencies, expansion of tax base, compliance management, etc. have either been accepted or implemented to ensure a better relation between the taxpayer and the tax collector.
Shift towards service-based strategies:
Tax administrators in India have for long implemented enforcement-based strategies and it is only in recent years that there has been a shift in stance to service-based strategies.
- Introduction of a citizen’s charter in both direct and indirect tax statutes of India. It helps in enforcing existing rights.
- India has also renegotiated the much-abused provisions in some of its DTAAs, namely with Switzerland, Mauritius, Cyprus and Singapore. Capital gains-related issues and exchange of information on taxation matters have been better addressed in these amended agreements.
Taking everything into account, there is more awareness on taxpayers’ obligations and rights. While attempts are there to increase the rights and to provide better service for genuine taxpayers, the taxpayers who deliberately abuse tax provisions should not expect much leniency. A quest for balance between the rights and obligations of a taxpayer must be achieved. Shifting tax administration from an enforcement to a service-based model will lead to higher yields
Connecting the dots:
- With major reforms in tax administration like GST an GAAR in process its time India shifts towards a service-based model in tax administration. What benefits such a shift will yield. Discuss.
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