GS Analyst: Daily Current Affairs

The Indian government has cut the recently imposed cesses and levies on diesel and aviation turbine fuel (ATF) and removed the cess on exports of petrol.

Background

• Due to the Global crude prices are rising and domestic crude producers were making windfall gains, the government is trying to back the economy from recession.
• Private oil marketing companies were exporting petrol and diesel to foreign countries like Australia for better realisation.
• The shortage of fuel at retail outlets because of the oil marketing companies were not willing to sell the commodity at a loss since prices had not increased despite rising crude and depreciating rupee.

Reason for Duty cuts on fuel

• Addressing Fuel Shortage: With an aim to address the issue of fuel shortage in the country, the government had imposed special additional excise duty on export of petrol and diesel.
• Cesses equal to 6 per litre on petrol and Rs.13 per litre on diesel were imposed on their exports.
• Global Recession: The government also imposed a cess of Rs.23, 250 per tonne (by way of special additional excise duty) or windfall tax on domestic crude being sold to domestic refineries at international parity prices.
• The government has also exempted petrol, diesel and ATF from levy of duties when exported from refinery units located in Special Economic Zones.

Impacts of Windfall tax

• On External Trade: For India, which imports 85% of its requirements, costlier oil implies a higher import bill and inflation, besides straining the current account, the broadest measure of India’s goods and services transactions with the rest of the world.
• Less Investment: Investments in the Oil sector and related industry hit hard after the spur in Windfall tax.

Government Interventions

• Incentivise the oil production: To incentivise higher domestic output, the cabinet committee on economic affairs has decided to provide greater pricing power to domestic oil producers to enable market-determined price discovery.
• CCEA’s decision thus could result in ONGC gaining by 7-8% from its crude and spur more investments in exploration and drilling, resulting in higher output. 
• Inclusion of Oil producers: They deregulate the crude sales and the waiver from allocating domestically produced oil only to government-owned refineries.
• PPP model: The largest state-owned producer, ONGC, thus can auction its output from Mumbai High to any refinery in the public and private sector.