s mukerjee & k rao_taxation of petroleum products

8/3/2019 S Mukerjee & K Rao_Taxation of Petroleum Products

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Understanding the Impact of Taxation of Petroleum

Products in India

Sacchidananda Mukherjee

R. Kavita Rao

National Institute of Public Finance and Policy

(NIPFP)



Structure of Presentation

Introduction

Administered Pricing of Petroleum Products

Environmental Impacts of Petroleum Products

Revenue Generation from Petroleum Products

Methodology

Results

Conclusions



Introduction

Taxes on petroleum products generate substantial revenues to the Central

and State Governments The contribution of tax revenue from petroleum products varies across the

States depending on their consumption & production base and the prevailing tax rates on petroleum products

States keen to keep petroleum products out of GST base

² contributes to cascading

² could limit growth (?)

Two separate factors drive taxation of petroleum products

² revenue considerations (easy to tax)

² environmental considerations The tax on petroleum products and corresponding change in prices generates

both direct and indirect impacts across the sectors

Understanding on the economy wide impacts of changes in prices (or taxes)of petroleum products is limited

Policy dialogue, therefore not driven by such analysis



Administered Pricing of Petroleum Products

Prices of petroleum products are administered in India, the oilcompanies (mostly under PSU) cannot change prices in response to volatility of international crude oil prices and/or their other costsof production

Domestic market price does not necessarily reflect either the

international crude oil prices or the costs of production

Frequent adjustments of domestic market prices are carried out tocompensate the loss incurred by the oil companies followed by taxcuts to protect consumers. Concerns of inflationary pressures.

The response of tax cut and corresponding loss to the governmentexchequer is mainly due to reduce inflationary pressure in thedomestic market

Taxes, therefore do not represent the only government intervention

in this sector. Ideally, the combined effect needs to be assessed.



Environmental Impacts of Petroleum

Products Combustion of petroleum products (gasoline, diesel etc.) generates

a cocktail of pollutants which are the main source of ambient airpollution for cities and towns in India

From environmental and public health stand point, petroleumproducts are seen as ¶sin· products

With growing income and improved standard of living, the demand

for clean air will grow across Indian cities and towns

Combustion of fossil fuel also generates green house gases likecarbon monoxide and carbon dioxide, therefore to meetinternational environmental commitments, it would be necessary

to reduce emissions of green house gases in future



Environmental Impacts of Petroleum

Products

Figure I: Environmental Dimensions of Taxation of Petroleum Products

Engine Standard Fuel efficiency

standard

Compliance with

Emission standard

(e.g., Eur o IV, III etc.)

Physical features o f

vehicle (e.g., size,

weight, engineca pacity etc.)

Fuel Choice (Electric car,CNG, LPG, Gasoline, Diesel)

Fuel Standard (low sul phur,

low lead, high octane/cetane

number)

Emission

Control Devices

(e.g., Catalytic

Converter)

Exhaust

Emissions (CO,

HC, NOx, SOx,

PM)

Instruments to Control Vehicular Pollution



R evenue Generation from Petroleum

Products

Central Government exchequer: excise duty, corporatetax, customs duty, cess, tax on dividend and service taxes

State Government exchequer: sales tax, royalties, octroiand other duties

Excluding dividend from oil companies under PSU, thecontribution of tax revenue from petroleum products tothe Central Government exchequer has gone up from Rs.58,789 crore in 2002-03 to Rs. 96,486 crore in 2007-08

Sales tax payments made by the oil companies to StateGovernments contribute on an average 20.7 per cent of own tax revenue of the States (averaged over 2000-01 to2006-07). Presently in the range of 30%.



Revenue Generation from Petroleum Products (contd.)

Estimated Contribution Exchequer 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 (P)Central Exchequer

Cutom Duty 7,953 9,552 11,697 9,157 10,043 12,625 6,299

CESS 5,213 4,766 4,891 4,884 6,899 6,924 6,758

Excise Duty 32,964 35,364 38,150 47,180 51,922 54,761 54,117

Royalty 1,738 1,620 2,181 2,306 2,794 3,064 3,146

Corporate Tax 10,249 10,038 11,180 10,896 12,153 16,318 12,031

Tax on Dividend 269 1,110 1,513 1,315 1,362 1,850 1,077

Others (includes service tax) 403 425 439 347 666 944 870

Sub total 58,789 62,875 70,051 76,085 85,839 96,486 84,298

State Exchequer

Sales Tax 29,166 32,080 38,935 46,667 56,115 56,445 63,349

Royalties 1,654 1,643 2,251 3,199 3,568 4,184 2,451

Dividend to State Governments 10 18 21 19 22 28 20

Octroi, Duties (includes Electricity Duty) 1,253 1,032 1,313 2,211 1,891 1,683 1,941

Others (includes service tax) 74 408 734 157 525 1,105 525

Sub total 32,156 35,181 43,254 52,253 62,121 63,445 68,286

Total Contribution 90,945 98,056 113,305 128,338 147,960 159,931 152,584

Source: Compiled by Authors from Various Sources

Contribution to Exchequer from Oil Companies (in Rs. Crore)



Revenue Generation from Petroleum Products (contd.)

State 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Average Andhra Pradesh 18.4 12.9 20.7 21.3 21.3 21.5 21.0 19.6

Arunachal Pradesh 9.2 12.5 14.6 20.8 27.5 16.9

Assam 24.9 23.3 24.5 8.0 30.7 17.1 8.6 19.6

Bihar 21.0 18.5 25.0 20.6 27.2 29.1 28.8 24.3

Chhattisgarh 9.0 8.4 12.3 13.8 15.9 16.4 16.5 13.2

Goa 42.6 26.3 33.4 33.4 29.4 30.8 28.8 32.1

Gujarat 23.8 27.2 36.0 29.9 24.9 24.8 26.6 27.6

Haryana 16.6 12.8 15.0 15.1 19.2 16.8 15.4 15.8

Himachal Pradesh 10.5 8.8 11.1 13.2 13.7 13.9 19.4 12.9

Jammu and Kashmir 14.9 11.5 15.4 14.8 15.2 16.7 17.1 15.1

Jharkhand N.A. 9.4 14.0 18.2 21.3 20.7 23.3 17.8

Karnataka 15.5 12.7 15.8 16.3 15.0 15.3 14.2 15.0

Kerala 21.1 17.5 20.4 22.8 21.2 21.5 16.9 20.2

Madhya Pradesh 16.6 15.2 18.6 20.3 20.8 20.2 22.7 19.2

Maharashtra 21.1 14.4 23.5 22.9 22.8 25.0 23.1 21.8

Manipur 27.7 21.0 24.9 26.0 25.1 29.4 56.0 30.0

Meghalaya 11.6 8.0 12.8 10.4 14.7 23.9 23.0 14.9

Mizoram 23.5 26.1 34.3 34.7 35.1 32.0 30.8 30.9

Nagaland 16.1 25.9 22.6 21.9 23.7 24.6 23.2 22.6

Orissa 16.0 11.2 15.2 16.0 15.9 16.7 14.7 15.1

Punjab 15.6 13.4 15.3 16.3 17.2 15.2 19.0 16.0

Rajasthan 19.2 15.6 22.6 22.7 23.1 23.1 22.3 21.2

Sikkim 9.3 9.1 9.3 10.2 12.5 12.0 96.1 22.6

Tamil Nadu 19.3 14.6 18.8 19.1 19.3 18.8 16.6 18.1

Tripura 10.8 12.5 13.4 12.9 13.9 13.0 12.7 12.7

Uttarakhand 16.0 13.7 16.1 16.2 17.5 171.7 20.7 38.8

Uttar Pradesh 19.0 17.4 18.8 19.3 19.9 20.2 17.8 18.9

West Bengal 16.1 11.9 16.1 15.7 18.4 19.3 17.5 16.4Source: Data Compiled from RBI's State Finances Statistics and NIPFP (undated)

Sales Tax Payments on Crude Oil Condensates and Petroleum Products made by the Oil Companies to State/UT

Governments (as % of Own Tax Revenue of the Respective State)



Methodology

Two alternative questions being asked

What is the extent of cascading due to

petroleum taxes

Can one design GST to reduce cascading without changing revenue profile?



Methodology (contd.)



Methodology for Estimation of Total Tax Liability

We consider a model for three sectors to understand the degree of cascading of taxes oncrude petroleum and petroleum products. The sectors are crude petroleum, petroleum

products and other goods and services. The model is extended to cover 46 sectors of theeconomy.

Pc = a11Pc + a21 Pp(1+t) +a31 Po (1+) + VcPp = a12Pc(1+ ) + a22Pp + a32Po (1+ ) + Vp

Po = a13 Pc(1+ ) + a23Pp(1+t) + a33Po + Vo Where

Pc: Producers· price of crude petroleumPp: Producers· price of petroleum products

Po: Producers· price of other goods and service

aij: to produce 1 unit of output in the jth sector, input requirement from ith sector

: tax on crude petroleum (i.e., excise duty, custom duty, royalty etc.)

t: tax on petroleum products (e.g., excise duty, custom duty, sales tax, additional surcharges, entry taxetc.)

: tax on other goods and services (e.g., excise duty, VAT etc.) Vc: gross value added per unit of output of crude petroleum

Vp: gross value added per unit of output of petroleum products

Vo: gross value added per unit of output of other goods and services

When , t and are positive, it provides a case where there are non-rebatable taxes on allthese sectors.

When, only t is positive, it would imply a regime with excise only on petroleum products



Methodology for Estimation of Total Tax Liability (contd.)




According to national accounting framework, the output (Y, final demand) or TotalFinal Use is determined by Y (or F) = C+I+G+(X-M)

Where, C: Private Final Consumption Expenditure (PFCE)G: Government Final Consumption Expenditure (GFCE)I: Gross Fixed Capital Formation (GFCF)X: Export

M: Import

Therefore, value of sales could be proxied by multiplying (scalar) P (prices) with F(final demands) and therefore R=P x F

We consider three scenarios as follows:Baseline scenario (BL): is 0.0%, t is 0.0% and is 0.0%, which implies that tax

credit is available for all the sectors

Scenario I: is 15%, t is 35% and is 20%, when tax credit is not available for any of the sectors

Total Tax Liability = R S-I - R BL

Scenario II: is 0.0%, t is 35% and is 0.0%, when tax credit is available for allgoods and service except from petroleum products

Total Tax Liability =R

S-II -R

BL




Estimation of Scenario III

We estimate the revenue neutral rate of tax on petroleumproducts (t) such that R S-II ² R S-I becomes zero. We found

that at t = 62% difference between Total Tax Liability between scenario II and scenario I vanishes.

Scenario III: is 0.0%, t is 62% and is 0.0%, when taxcredit is available for all goods and service except onpetroleum products

Total Tax Liability = R S-III - R BL



Methodology for Estimation of Direct Tax Liability



Data Sources Total Expenses (adjusted) = Expenses (total) - Compensation to

employees (total) - Indirect Taxes (total) - Amortisation (total) - Write-

offs (total) - Expenses capitalised (total) - Expenses transferred to DRE

(total) - Prior period and extra-ordinary expenses (total)

We estimate the c vector which is the average of expenses on Power &

fuel as percentage of Total Expenses (adjusted) for 46 sectors

I-O Coefficient Matrix for 2006-07 provides information for 130 items.

However, these 130 items are clubbed under 46 sectors

PROWESS database provides information on expenses on Power and

Fuels together, however to separate the power and fuel expenses, we have

taken the help of I-O coefficient matrix



Results

The direct impact shows the tax incidence of the sector. Sectors

having high direct impact implies that a percentage point change in

tax rates on power and fuel will have substantial impact (direct) on

the sector

The difference between total and direct impact shows the cascading

impacts of the sector

Sectors having high difference (total ² direct impact) as percentage

of direct impact, are the major sectors which are affected by

cascading impacts



2007 2008 2007 2008 2007 2008

Agriculture and allied activities (incld. Fishing) 3.58 3.87 3.94 4.18 10.04 8.10

Mining of coal and lignite 10.85 9.56 13.54 12.05 24.85 26.06

Extraction of natural gas 0.35 0.80 0.88 1.30 148.52 62.98

Extraction of crude petroleum 0.31 0.69 10.07 9.60 3200.86 1294.39

Pulp and paper products 15.75 14.61 22.41 20.68 42.31 41.53

Publishing and printing 2.51 2.00 3.64 3.03 44.85 51.61

Mfg. of coke, refined petroleum pdts. 2.35 1.32 14.18 12.94 503.27 883.89

Mfg. Chemicals 7.03 6.53 8.77 8.22 24.77 26.02

Rubber and plastic products 5.40 5.46 8.01 8.27 48.36 51.37Non-metalic minreal products 17.53 16.55 18.28 17.26 4.27 4.26

Mfg. base metals 8.31 7.37 10.74 9.52 29.18 29.10

Fabricated metal products (excld. machineray) 4.68 4.65 5.99 5.82 27.86 25.17

Mfg. of machinery 2.80 2.32 3.51 2.96 25.29 27.56

Mfg. of electrical machinery 2.91 2.58 3.39 3.03 16.61 17.28

Mfg. radio, TV, and comm. Equipments 2.87 2.52 4.09 3.68 42.45 46.13

Mfg. motor vehicles 4.56 4.32 5.58 5.23 22.19 21.21

Mfg. transport equipments 4.96 2.67 5.37 3.01 8.25 12.89

Mfg. furniture & others manufacturing n.e.c. 1.11 1.02 2.77 2.83 150.87 177.94

Electricity, gas etc. supply 2.23 2.73 12.59 12.54 464.27 359.85Water supply 1.68 5.38 2.17 6.44 29.36 19.78

Construction 2.52 1.83 3.02 2.89 19.55 58.24

Retail and wholesale trade of motor vehicles 2.31 2.21 17.93 16.80 675.68 659.61

Hotels and restaurants 10.37 9.18 11.94 10.70 15.08 16.65

Land transport 14.46 11.42 21.49 18.06 48.66 58.24

Air transport 22.32 29.72 22.52 29.90 0.88 0.60

Post and telecommunications 2.74 3.60 6.25 7.08 128.14 96.53

Financial intermediaries, Banking and financial

services1.18 1.13 8.99 8.45 663.85 648.67

Source : Computed

Table 2: Direct and Total Impacts of Power and Fuel Expenses across Sectors

Description of the Sectors

Direct Impact: Average

Expenses on Power and

Fuel as Percentage of

Total Expenses (adjusted)

(%) (c')

Total Impact (Cascading

Impact): Power and Fuel

(c*')

Difference as Percentage

of Direct Impact (%)



2007 2008 2007 2008 2007 2008

Agriculture and allied activities (incld. Fishing) 2.85 3.08 3.05 3.25 7.13 5.79Mining of coal and lignite 4.41 3.89 5.55 4.92 25.74 26.68

Extraction of natural gas 0.13 0.30 0.38 0.54 184.34 76.91

Extraction of crude petroleum 0.22 0.51 6.39 6.29 2746.21 1140.48

Publishing and printing 0.64 0.51 1.11 0.95 74.52 88.13

Mfg. of coke, refined petroleum pdts. 1.74 0.97 9.05 8.48 420.05 771.42

Mfg. Chemicals 4.23 3.92 5.20 4.91 23.13 25.20

Rubber and plastic products 2.32 2.34 4.05 4.33 74.71 84.81

Non-metalic minreal products 8.90 8.40 9.28 8.75 4.24 4.14

Mfg. base metals 3.15 2.79 4.16 3.68 32.09 31.69

Fabricated metal products (excld. machineray) 2.12 2.11 2.71 2.63 27.32 24.69

Mfg. of machinery 1.28 1.06 1.60 1.35 25.52 27.69

Mfg. of electrical machinery 1.18 1.04 1.40 1.25 18.69 19.99

Mfg. radio, TV, and comm. Equipments 1.07 0.93 1.54 1.40 44.90 49.61

Mfg. motor vehicles 1.21 1.15 1.64 1.53 35.32 33.54

Mfg. transport equipments 2.35 1.27 2.60 1.49 10.52 17.44

Mfg. furniture & others manufacturing n.e.c. 0.47 0.43 1.61 1.75 240.36 303.07

Electricity, gas etc. supply 0.53 0.64 5.20 4.98 889.40 675.89

Water supply 0.12 0.37 0.30 0.61 158.00 66.08

Construction 1.29 0.93 1.47 1.17 14.18 26.22

Retail and wholesale trade of motor vehicles 1.96 1.87 10.03 9.61 411.73 412.96

Hotels and restaurants 4.89 4.33 5.78 5.26 18.12 21.67

Land transport 9.11 7.20 12.81 10.81 40.56 50.20

Water transport 7.66 9.12 7.84 9.30 2.43 1.97

Air transport 21.75 28.96 21.84 29.04 0.42 0.29

Other transport activities 0.53 0.44 0.76 0.65 42.99 48.98

Post and telecommunications 0.89 1.17 2.68 3.04 201.50 160.67


services0.94 0.90 4.62 4.34 390.50 380.34

Source : Computed

Total Impact: Fuel (c*')

Difference (Fuel) as

Percentage of Direct

Impact

Table 3: Direct and Total Impacts of Fuel Expenses across the Sectors


Direct Impact: Share of

Expenses on Fuel as

Percentage of Total

Expenses (adjusted) c'



Agriculture and allied activities (incld. Fishing) 319,431 449,117 319,431 297,468 561,913 526,315

Forestry and Logging 6,237 9,295 6,237 6,158 10,972 10,895

Mining of metal ores 2,417 3,514 2,417 2,326 4,252 4,115

Publishing and printing 1,345 9,891 1,345 6,540 2,366 11,572

Mfg. of coke, refined petroleum pdts. 710,855 692,245 0 36,688 0 64,913

Mfg. Chemicals 20,360 29,776 20,360 19,705 35,815 34,864

Rubber and plastic products 14,613 28,103 14,613 18,596 25,706 32,903

Fabricated metal products (excld. machinery) 9,143 20,106 9,143 13,271 16,083 23,481Mfg. of machinery 43,044 102,968 43,044 68,012 75,718 120,335

Mfg. of electrical machinery 21,037 47,511 21,037 31,399 37,006 55,555

Mfg. radio, TV, and comm. Equipments 9,090 29,029 8,871 19,053 15,606 33,711

Mfg. of medical instruments, watches and clocks 1,665 6,299 1,665 4,165 2,929 7,370

Mfg. motor vehicles 19,159 54,319 19,156 35,889 33,698 63,499

Mfg. transport equipments 15,691 29,536 15,691 19,531 27,603 34,556

Mfg. furniture & others manufacturing n.e.c. 2,955 9,592 2,955 6,347 5,198 11,230

Electricity, gas etc. supply 85,391 151,169 84,778 99,333 149,133 175,751

Construction 2,483 5,824 2,483 3,841 4,368 6,796

Retail and wholesale trade of motor vehicles 67,143 126,124 67,143 83,538 118,112 147,804

Hotels and restaurants 53,190 102,200 53,190 67,650 93,566 119,693

Land transport 1,432,555 1,812,309 1,432,555 1,200,385 2,520,011 2,123,862

Water transport 8,523 12,154 8,523 8,050 14,993 14,244

Air transport 19,499 24,311 19,499 16,107 34,301 28,499


services

7,899 14,569 7,899 9,648 13,895 17,070

Total Tax Collected (Rs. Lakh) 3,132,720 4,361,027 2,420,997 2,464,808 4,258,783 4,361,027

Table 4: Direct and Total Tax Liability under Each Scenario


Case III:

Total tax

Liability

(Rs. Lakh)

Case II:

Total tax

Liability

(Rs. Lakh)

Case I:

Total Tax

Liability

(Rs. Lakh)

Case I:

Direct Tax

Liability (Rs.

Lakh)

Case II:

Direct Tax

Liability (Rs.

Lakh)

Case III:

Direct Tax

Liability (Rs.

Lakh)



Conclusions

Any change in prices (or tax rates) of petroleum products will

have both direct and cascading impacts across the sectors

Sectors having larger direct impacts have larger tax incidence, it

implies that one percentage point change in tax rate will havesubstantial impact (direct) on the sector

The sectors having larger cascading impact suffer significantly

by hidden taxes

Depending on composition of economic activities across

States, different states will have different tax incidence



Conclusions (contd.)

Even under sustainable development regime, it is not clear what are those additional benefits to be obtained by notallowing for input tax credit for inputs going into theproduction of these fuels as well

The same total revenue impact and the deterrent throughnon-rebatable taxes on petroleum products can beintroduced without the need for cascading of the inputtaxes into petroleum sectors as well

In this case, the extent of cascading seems to be distinctly lower, which recommends this approach even for a policy advocating sustainable development

s mukerjee & k rao_taxation of petroleum products

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