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Fuel prices are at their peak. Though things aren’t able to be much constant petrol has smartly maintained its position on the top spot for a long time now. Petrol is for 90Rs per litre which is even worse. There are a lot of factors behind this rise in fuel prices. The blog is focused mainly on portraying the real aspects of such an exorbitant increase.
How are Fuel Prices determined?
The very first thing that anyone can do to understand the rise and dips in fuel prices is to understand how are fuel prices determined. The price determination of various fuels like petrol and diesel is based on various national and international factors such as:
Crude oil prices:
Crude oil which is also known as unrefined oil is the main determinant. Any fluctuation in the availability of crude oil or changes in the international crude oil market directly affects the prices in the importing countries.
Taxes on fuel price:
When crude oil is imported into India it is liable to various excise duties. The duty and other taxes are charged in regards to the current tax rate that is prevailing in the territory.
Supply to demand ratio:
The economical supply and demand are also very important in price determination. When the demand increases it automatically leads to a decrease in supply. Which ultimately leads to a spike in price. This is how the invisible demand and supply come into force.
Exchange rate influence:
The dollar to rupee exchange rate matter a lot. If the dollar strengthens against the rupee, the price of imported oil also goes up.
Now, this is unknown to most of us. The refinery in which the crude oil is sent for filtration plays a major role. If the refinery is of a lower grade then much of the oil would be lost in the process of refining. This would cause a lower availability of fuel and hence a higher price.
Some more specific forces come into play in India only. One such force is the Oil marketing company prices. Oil is distributed in the country through some intermediary companies which add some extra prices as a commission before sending the oil further.
The Existing Tax Structure
VAT is also charged depending upon the oil that also varies with the states. Central and state taxes are also levied which is the same across the country. The current rates are 21.48 per liter.
Why is GST not levied on fuel prices?
Most of you may think if GST is applied to fuel prices, then any rise in fuel price will not affect you anymore. And yes you are right.
But there is a valid reason for not applying GST to fuel Prices. One of the reasons is the existing tax structure. This structure is designed in such a way that will help the government to generate revenue.
If Fuel is categorized under GST then the government would lose much of its revenue and it wouldn’t be good for the economy as well.
GST is calculated on goods by placing them in various tax slabs. Even if Crude oil is placed in the highest tax bracket then also it would not be anywhere close to the collective total of VAT and Excise duty.
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What if the Taxes on fuel prices are lowered?
Apart from being a prime source of revenue, taxes on petrol and other fuel play a significant role in maintaining a balance in the economy. If for example the taxes are reduced then the overall fuel prices would also be reduced.
The prices of goods depend on the transportation cost as well. With the fall in fuel prices, transportation costs would also be reduced which would decrease the prices of manufactured goods. Reduction in prices would lead to higher demand.
Availability of all the goods at very cheap rates is not beneficial for the growth of the economy. This would even lower the value of Indian currency in the International stock market.
Plus with much of the revenue gone, the government would not be able to plan further expansions as well.
What should be the fuel prices in developing countries?
Developing countries should indeed aim at keeping the prices of the commodities low for maximum consumption but every coin has two sides, so does this good-sounding idea.
Lower fuel prices would also mean larger consumption which would increase the level of pollution. Whether it be a developed or a developing country, high levels of pollution are always bad and harmful.
By reducing fuel prices developing countries might find a solution to many of its problems such as inflation but would also end up creating more for themselves.
India is also planning to minimize its carbon emission hence it is not feasible to allow larger consumption.
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The difference in National and International prices
49$ is the current cost of one barrel of crude oil internationally but the prices are still so high in India. High taxes that are levied can do much of the explaining.
These taxes contribute to about 60-63% in the hike. This should also be noted that this % is the highest in the world.
Why isn’t the government doing anything?
At the present moment, the retail inflation is at its peak (7.6%) and because of such high inflationary pressure, the government is also in no position to help.
The covid crisis has further added to the worsening but there is little scope for any improvement at this time.
This was all the in-depth analysis of the present situation. Now you must have got an idea about how all of this works and where we stand. Rising fuel prices are a challenge but there is not just one factor that