Macro Economic Assessment of Taxes on Petro Products in India: A Case for Tax Rate Rationalization and Fiscal Consolidation

Tax on Petroleum products is a significant fiscal instrument. Besides being items of revenue receipt for Government exchequer, both at States and at Centre; taxes on petroleum products become cost items to producers. Those taxes add to the selling price of the products which are passed on to the customers on products which are essential item for its users. For every Government in the world, petroleum products are easy objects of taxation, as product in bulk is taxed at supply sources and taxes are paid by the marketers, private and public, who are always limited in number. Petroleum products have well defined supply chain, due to the nature of product being liquid or gaseous and being hazardous; therefore, products follow well structured documents, making tax avoidance not easy. Some of the milestone supply links become easily identifiable points of tax collection (on output) or availing input credit. Being essential items to users, without having substitutes in the short run, the demand for petroleum products are less elastic to price. Therefore, it is easy to revise tax rates, without reverse variation in consumption volume, and that attaches buoyancy to revenue collection.

From the consumer's perspective, taxes on petroleum products are unavoidable and the incidence of taxes on petroleum products pinches the housewife's monthly budget. Price sensitivity of the petroleum products therefore usually gets pronounced in the market and in media easily.