It’s not oil bonds, dwindling taxes, mounting debt forced FM’s hands

Union Finance Minister Nirmala Sitharaman called the UPA’s policy of issuing oil-bonds a ‘trickery’. A charge countered by the Congress, which accused the NDA government of falsehood as it spent over Rs 73,000 crore on bond payment in 7 years while it collected Rs 22.34 lakh crore from the petroleum sector during the same period. The shrill debate is all about the oil-bond servicing obligation that has been estimated at Rs 2.42 lakh crore between 2014-15 to 2025-26 and their impact on petrol and diesel prices today, writes ETV Bharat's Deputy News Editor Krishnanand Tripathi.

New Delhi:Despite the clear risk of an electoral backlash, Prime Minister Narendra Modi’s government has refused to cut down the excise duty on petrol and diesel that may help soften the retail prices, which are at a record high.

Finance Minister Nirmala Sitharamam blamed the previous UPA government for shifting the burden to future generations by issuing oil bonds for keeping the prices low during its tenure.

A charge denied by Congress, which says the government has earned several times more money from the sector than its oil-bond repayment liabilities.

Sitharaman called the UPA’s policy of issuing oil-bonds a ‘trickery’. A charge countered by the Congress, which accused the NDA government of falsehood as it spent over Rs 73,000 crore on bond payment in seven years while it collected Rs 22.34 lakh crore from the petroleum sector during the same period.

The shrill debate is all about the oil-bond servicing obligation that has been estimated at Rs 2.42 lakh crore between 2014-15 to 2025-26 and their impact on petrol and diesel prices today.

Facts about UPA era oil-bonds

According to a report by Kirit Parekh committee, the UPA government issued oil bonds worth Rs 1.42 lakh crore between 2005-06 to 2008-09 to Oil PSUs so that they can cover the under-recoveries, as they were not allowed to pass on the burden of high crude oil prices to consumers.

During the last seven years of Prime Minister Narendra Modi’s government, a total of Rs 73,696 crore (interest Rs 70,195 crore & principal Rs 3,500 crores) has already been paid for servicing of oil bonds, as per the data shared by the ministry of finance with ETV Bharat.

An amount of over Rs 1.68 lakh crore, (Rs 1.31 lakh crore principal and Rs 37,340 crore interest) is due for repayment between this fiscal and FY 2025-26, taking the total burden of servicing the oil bond between 2014-15 and 2025-26 to Rs 2.42 lakh crore.

Last year’s excise collection enough to pay oil bonds

A back-of-the-envelope calculation shows that the total oil bond repayment requirements from 2014-15 to 2025-26, which has been estimated at Rs 2.42 lakh crore, is actually less than two-third of the Centre’s excise duty collection from the petroleum sector last year that has been estimated at some Rs 3.72 lakh crore by the Petroleum Planning & Analysis Cell.

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As per these numbers, the reasoning offered by finance minister Sitharaman does not cut much ice. On the other hand, Congress leader Ajay Maken’s charge of the Centre earning Rs 22.34 lakh crore from the petroleum sector cannot be taken at the face value either.

Petro gold mine for Centre & States

An analysis of the latest data available on Petroleum Planning and Analysis Cell’s (PPAC) website shows that the total contribution of the petroleum sector to the central government in the last seven years was Rs 22.34 lakh while States and Union territories earned Rs 13.84 lakh crore.

It suggests that the Centre accounts for nearly 62%, and States and UTs account for little over 38% of the total collection of Rs 36.18 lakh crore from the petroleum sector but that is not the complete picture.

A deeper scrutiny of official data would tilt the balance in States’ favour as they receive a sizable part of the taxes and duties collected by the Centre from the petroleum sector as their share in the Union’s divisible pool.

Of Rs 22.34 lakh crore collected by the Centre in the last 7 years, Rs 19.65 lakh crore (88%) is further divided between the Centre and States as per the devolution formula recommended by the finance commission.

The remaining 12%, including Cess collection of Rs 1.02 lakh crore, royalties, dividends, profit from exploration, is not shared with States.

How Centre’s collection is shared with States

The seven-year period of Prime Minister Modi’s government covers three finance commission awards. For 2014-15, 13th Finance Commission recommended 32% share for States; for 2015-20 period, 14th FC set the States’ share at 42%; and 15th FC set the share at 41% for 2020-2026.

As per the commission’s formula for the respective year, States’ share turns out to be some Rs 8.08 lakh crore from Rs 22.34 lakh crore collected by the Centre in the last seven years. Rs 43,000 crore in 2014-15, Rs 5.9 lakh crore between 2015-20 and Rs 1.75 lakh crore in FY 2020-21.

Once States’ share in divisible pool of petroleum sector duties and taxes is factored in, it tilts the balance in States’ favour as they account for some Rs 22 lakh crore, 61% of total Rs 36.18 lakh crore, while the Centre’s share shrinks to 39% or Rs 14.26 lakh crore.

Mounting debt, low tax revenue

Experts who have closely tracked the sector and the finances of the Centre admit that oil-bond repayment liability is not the main reason for levy of higher excise duty on petrol and diesel.

“Excise collection is obviously more than the total repayment liability,” a former petroleum secretary told ETV Bharat, who wished not to be named.

Experts blame weak financial position of the Centre due to the pandemic as three biggest sources of its revenue - corporate tax, income tax and GST – suffered a cumulative decline of Rs 5.89 lakh last from their budget estimates last year, from Rs 20.09 lakh crore (BE) to Rs 14.2 lakh crore (RE), a decline of 29%.

Only exception was excise duty collection that went up from Rs 2.67 lakh crore (BE) to Rs 3.61 lakh crore (RE), but was not enough to cover the overall decline of Rs 5.23 lakh crore in tax collection even if it led to a record increase in the retail prices of petrol and diesel.

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The economic adversity caused by the Covid-19 pandemic forced the government to borrow more, taking the fiscal deficit to a record Rs 18.49 lakh crore, 9.5% of the GDP last year.

These two factors, a decline of Rs 5.23 lakh crore in tax collection last year, and a massive borrowing of over Rs 33 lakh crore in two years (FY 2020-22) have tied the government’s hands and collecting more money from the petroleum sector appears to be an easy option for the government.

Excise duty on petrol and diesel is easier to collect as sellers are Oil PSUs and every sale is accounted for unlike other indirect taxes such as GST and direct taxes like income tax and corporation tax that are prone to tax evasion, compliance and collection issues.

It’s not just the high incidence of excise duty on petrol and diesel, the government is also aggressively pushing disinvestment and asset monetisation to garner more resources during the pandemic that has made Prime Minister Modi’s second inning extremely challenging.

*Data: Budget documents, MoPNG, ETV Bharat calculation.