Oil and gas prices should be rationalised

Business

oi-Shoaib MD

By Shoaib Zaman

Published: Saturday, June 25, 2011, 12:36 [IST]

The drama of reactions would start in the country in the aftermath of fuel price hike, but that really doesn't solve any problem. Indeed, the first thing to understand in this case would be how the prices of petroleum products like petrol, diesel, LPG and kerosene are fixed?

The honest answer is not known as there is no rationality in the prices, as the taxation system of the government on oil products are complex.

To make it clear, since the current tax regime is calculated in percentage, whenever there is a hike in price of oil products, the effect will be higher.

Suppose if the tax component is 10% of price and current oil products cost is Rs 40, then after taxes the price at which it will be sold to the customers would be Rs 44 (40+(40 x 10/100)).

Now there is a hike of Rs 10 in the price of oil products.

Then the sale price would be Rs 55 (50+(50 x 100)) rather than Rs 54 (44+10).

Therefore, for a common man the price increase was not Rs 10, rather it will be Rs 11.

Similarly, although the current hike in diesel and LPG is of Rs 3 and Rs 50 respectively, it means an additional tax of 4-12% over this price.

Hence, the first step to be taken should be framing the government policy on taxation of petroleum products.

Also the government should remove subsidies completely as this will cover up the deficit angle, which will be in the interest of nation over the long run. None of us would want to face the situation of Greece. If fiscal prudence is not maintained over years it will have disastrous consequences over a period of time.

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