The central government has increased the duty on Petrol and Diesel by Rs.10 and Rs.13 respectively. On top of this, a number of state Governments have increased the VAT charged on these two key fuels. As of now, at 69%, India is charging the highest amount of taxes on Petrol and Diesel among all other countries. Here is how this is all going to affect you as well as your investments.
Oil companies took the blow
The Oil Marketing Companies (OMCs) such as IOCL, HPCL, BPCL etc have agreed to foot the increase on the excise duty. This means, you do not have to pay the Rs.10 or Rs.13 extra when buying petrol or diesel. They will be offsetting this against the windfall from the fall in crude prices.
But, they are willing to only accept the increase in excise duty. As of now 15 states such as Karnataka, Delhi, Tamil Nadu have increased the VAT on these fuels as well. The increase in prices from the hike in VAT will be borne by you and me.
The answer is yes, but not as much as you think. As mentioned earlier, the increase to us is just the hike in VAT. The price of Petrol before the increase and pandemic was around Rs.69.6 (Delhi). After the Central and state government increases the Price is still around Rs. 71.3.
So, you are paying about 1.5 bucks more than what it was earlier. Also, as of now, only 15 states have increased the VAT. But, with the increased spending by states to help during the Corona pandemic, other states are expected to follow.
Apart from paying a slightly higher price, you should know that you could have been paying lesser. What has happened is, as a side effect of the COVID crisis, the price of crude oil has dropped sharply, at one point of time it was in negative zone. This means, if not for the increase in excise duty by the government, you would have been paying 10 to 15 bucks lower than the current retail price of the fuels now.
The Excise duty on fuels go directly to the central government. The VAT on the other hand is shared between the Central and State governments. The governments use this money for their infrastructure and development needs. In the current scenario, with all the spending and stimulus due to COVID-19, Indian Government is in dire need of money.
What is the actual cost of Petrol?
The actual cost of Petrol is just Rs.17.96 per liter. Everything else is plain tax and a little bit of transportation and dealer commission. Here is the breakdown of how petrol price comes up from 18 bucks to 72 bucks in Delhi.
Header Price Actual cost price of 1 liter Petrol Rs.17.96 Transportation cost Rs.0.3 Excise Duty (to Central government) Rs.33 Dealer commission Rs.3.6 VAT (shared by Central & State governments) Rs. 16.44 Final price you pay for a liter of petrol Rs.71.3
Indirect impact on you and the stocks due to this
As I mentioned, you would have been paying Rs. 56 to Rs.60 for a liter of Petrol if not for the increase in excise duty by the government. But that is not the only thing that would have changed. If you have stocks in any of the oil marketing companies such as Indian Oil, Bharath Petroleum, Hindustan Petroleum etc, these stocks will be taking a beating. They already have been doing pretty badly due to the fall in crude. The market expectation was that they would be getting a huge windfall eventually from the fall on their books. Now this will no longer be the case. OMC stocks fell between 3% to 6% after the announcement to hike excise duties.
Paying the same amount of money to buy petrol or diesel sucks. But then again, in all fairness, the money is really needed by the government at the moment to ease the economy back to its feet from the drubbing it got from COVID-19. Price of petrol and diesel will bound to be in this range for the near foreseeable future, it is unlikely to decrease or increase by much.