On 1 July, if all goes to plan, the country would have formally transitioned to the goods and services tax (GST) regime. By the sheer path-breaking nature of the tax reform initiative, which for the first time economically unifies the country, GST will have a special place in India’s modern economic history. What about Budget 2017? For several reasons it, too, is a watershed moment.
Firstly, advancing the schedule is more than just a break with a colonial hangover. It actually gives an administration a full year to spend the money it has earmarked for various projects; of course it also means more work for our bureaucrats, who have long been used to a nine-month spending cycle.
Second, there is a fundamental reset to the nomenclature—plan and non-plan have been abandoned and instead replaced with revenue and capital expenditure. But this is much more than just a change in classification. The idea is to move to an outcome-oriented approach and the finance minister has announced that the Niti Aayog will monitor it.
Third, this budget is the likely template for the future. Given that GST rollout is imminent, the finance minister wisely chose not to tinker with the indirect tax rates. And most don’t realise, but the movement in indirect tax rates and slabs inevitably generate the news and hype about budgets; which is probably why most people came away feeling underwhelmed.
In that sense this year’s budget, sans tax rate changes, was sanitized to begin with. It focused on spending and listing out the government’s priorities within the fiscal sector: social sector with a particular accent on the poorest of the poor, farmers, rural sector and roads.
Going forward, this will be the likely contour of future budgets. Not a bad thing really. After all it is time Parliament and the country focused on government spending—so far it has been in the news mostly for the wrong reasons, like misappropriation of money.
Fourth, this budget has renewed the new-found focus on agriculture; especially the emerging agriculture economy, which includes new alternatives like horticulture, dairying and so on—all of which are vulnerable to market volatility. The Indian farmer is probably the biggest risk-taker in India right now, but the least rewarded; they are a proud people who don’t want largesse (as some commentators seem to think). By promising the introduction of derivatives as a hedge against price volatility and delinking perishables from the shackles of the Agricultural Produce Marketing Committee, the budget has set the ball rolling in integrating farms into the market economy (read that as the formal economy, with its attendant advantages).
Fifth, and finally, this budget marks the flowering of the federation. The 14th Finance Commission set the stage for the govt. to walk the talk on cooperative federalism, and the last two budget did precisely that; GST is just another example of how the centre and states are beginning to do things in tandem. And with the shift to outcome-based budgeting (as explained earlier) the allocations of public money has moved from departments to stakeholders—like states and the third tier, panchayats and urban local bodies (though this is very inadequate at the moment).
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Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.