5/7/2020 OMCs to cut margins: Steep fuel tax hikes swell Centre’s pocket, collection to touch Rs 1.4-lakh-crore/year - The Financial Express MARKET UPDATE TOP GAINER FOREX UPDATE 1Y Return Nifty Redington CRUDE OIL +24.88 9210.00 -60.90 78.20 +5.15 1854 +53 MORE MARKET STATS OMCs to cut margins: Steep fuel tax hikes swell Centre’s pocket, collection to touch Rs 1.4-lakh-crore/year By: Anupam Chatterjee Published: May 7, 2020 5:15:08 AM The steep hikes on auto fuel taxes - Rs 10/litre on petrol and Rs 13/litre on diesel – announced by the Centre late Tuesday won’t inflate the retail prices of these fuels immediately. X X The OMCs have over the last few months been seizing the opportunity afforded by the softening of crude prices to prop up their marketing margins. The steep hikes on auto fuel taxes – Rs 10/litre on petrol and Rs 13/litre on diesel – announced by the Centre late Tuesday won’t inflate the retail prices of these fuels immediately, as the oil marketing companies (OMCs) would for the time being adjust the extra cost against the recent fall in oil prices. The OMCs have over the last few months been seizing the opportunity afforded by the softening of crude prices to prop up their marketing margins. https://www.financialexpress.com/industry/omcs-to-cut-margins-steep-fuel-tax-hikes-swell-centres-pocket-collection-to-touch-rs-1-4-lakh-crore-y… 1/10 5/7/2020 OMCs to cut margins: Steep fuel tax hikes swell Centre’s pocket, collection to touch Rs 1.4-lakh-crore/year - The Financial Express For the Centre, the move could fetch a whopping Rs 1.4 lakh crore additional revenue annually, even with the estimated 12% fall in consumption of the two auto fuels in FY21. The states would get some Rs 20,000 crore of the extra Central revenue, given that part of the duty hikes are in the shareable pool; the states would also get a few thousand crores extra due to the expansion of the base their taxes (VAT/sales tax) apply. Including Uttar Pradesh that joined the bandwagon on Wednesday, 14 states have hiked their own taxes RELATED NEWS Bengal discom may seek on fuels since the start of Covid-19 lockdown, in what reflected the propensity of revenue-hungry state govt guarantee for bank governments to milk the auto fuels, given their minimal consumption elasticity. loans to meet expenses Delhi HC allows Bharti Fuel taxes have been used liberally by the Central and state governments in India to boost revenue receipts Airtel to rectify GST and meet budget contingencies, but the hikes implemented in recent weeks have been of unheard-of returns, claim Rs 923- crore refund magnitude. As CARE Ratings estimated, taxes as percentage of base price (charged to dealers) of petrol rose from 107% as on February 16, 2020 (the day before the Centre hiked the tax by Rs 3/litre) to a savage OMC stocks plummet after excise duty hike on 260% on May 6. The recent hikes have also been a great leveller, with taxes now adding up to 256% for petrol, diesel diesel’s base price, from 69% on February 16, 2020. The accompanying chart shows how the final price to the consumer remained largely unaffected by the large fluctuations in crude prices over the years. Of course, the retail prices of petroleum products are not linked directly to global crude oil price but are supposed to be determined on the basis of a formula of trade parity pricing (80% weight to landed cost of notional import of petroleum products and 20% to export price of petroleum products). However, the OMCs have not shown any alacrity to follow this formula after the retail prices of diesel and petrol got decontrolled. OMC shares crashed by up to 13% in intra-day trade on the BSE on Wednesday before recovering. Hindustan Petroleum Corporation shares closed down by 5.7%, Bharat Petroleum Corporation plunged 0.9% and Indian Oil Corporation by 2.7%, under-performing a 0.7% rise in the Sensex. A simple illustration will throw light on the pricing dynamics: retail petrol price in Delhi remained roughly at the same level on February 16, 2020 (Rs 1.9/litre) and on May 6 (Rs 71.1/litre). The assorted taxes levied by the Centre on the fuel however rose sharply from Rs 20/litre to Rs 33/litre between the two days, while state VAT increased marginally form Rs 15.3 to Rs 16.4/litre. While the dealer commission remained the same at Rs 3.6/litre through the period, the price charged to the dealer (which reflects the marking margins of OMCs) slid from Rs 33.1/litre on February 16 to just Rs 19 on May 6. Taxes on petroleum fuels, kept outside the ambit of the Goods and Services Tax (GST), have boosted the government coffers creditably. The Centre collected Rs 2.14 lakh crore from these taxes in FY19 and states garnered Rs 2.01 lakh crore. In April- December FY20, the Centre collected Rs 1.48 lakh crore through these levies and the states, a comparable Rs 1.44 lakh crore. X According to K Ravichandran, senior vice president at ICRA, “the hike in duties is credit negative for OMCs as their marketing margins would be reduced sharply”. Petrol and diesel in Delhi remained unchanged from March 16 to May 4 while the price of the Indian basket of crude has fallen 23.5% to $23.38/barrel in the same period, allowing OMCs to earn more from selling every litre of these fuels. As noted by ICICI Securities, auto fuel net marketing margin was up from Rs 4.96/litre in the second half of March to Rs 14.72/litre in the second half of April as retail prices of petrol and diesel remained stagnant despite the fall in refinery transfer price by as much as https://www.financialexpress.com/industry/omcs-to-cut-margins-steep-fuel-tax-hikes-swell-centres-pocket-collection-to-touch-rs-1-4-lakh-crore-y… 2/10 5/7/2020 OMCs to cut margins: Steep fuel tax hikes swell Centre’s pocket, collection to touch Rs 1.4-lakh-crore/year - The Financial Express Rs 12.6/litre in the same period. “Since the Central government is effectively appropriating the gains made by OMCs for its own balance sheet, the effect on inflation from Tuesday’s hikes is likely to be limited,” Rahul Bajoria, chief India economist, Barclays, noted, adding that “the fuel tax increases at state level are likely to prove to be inflationary to some extent”. Since the lockdown began in the last week of March, at least 14 states, including Uttar Pradesh, Maharashtra, Tamil Nadu, Karnataka, Rajasthan and West Bengal, have increased the value added tax/sales tax on these fuels by rates that correspond to retail price increases ranging from Rs 1-5/litre for petrol (Rs 0.5-7/litre for diesel). “As of now there is no change in pump prices,” MK Surana, CMD of HPCL, told CNBC TV18. “It is also a fact that over a period crude prices have come down and the impact of the reduced prices will absorb this excise duty, so it may not impact the companies to that extent,” Surana added. “Before the lockdown, (retail) prices were continuously brought down from January 11 onwards by almost around Rs 7/litre,” Surana said. According to the latest Central Board of Indirect Taxes and Customs order on fuel taxes, special additional excise duty on petrol has been hiked by Rs 2/litre and road cess has been hiked by Rs 8/litre. In case of diesel, special additional excise duty has been hiked by Rs 5/litre and road cess by Rs 8/litre. With these hikes, the excise duty on petrol went up to Rs 32.98/litre from Rs 22.98/litre and that on diesel to Rs 32.83/litre from Rs 18.83/litre. Subscribe to FE Daily Newsletter for latest updates on markets, business, money, infra & more, right in your mailbox Enter Your Email Subscribe X Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter. Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates. HOME | INDUSTRY | OMCs To Cut Margins Steep Fuel Tax Hikes Swell Centres Pocket Collection To Touch Rs 1.4-Lakh-Crore/Year https://www.financialexpress.com/industry/omcs-to-cut-margins-steep-fuel-tax-hikes-swell-centres-pocket-collection-to-touch-rs-1-4-lakh-crore-y… 3/10.