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Cheap diesel is flowing from Uttar Pradesh, Haryana and Punjab to neighbouring Delhi and Rajasthan through legal and illegal routes, executives of oil marketing companies and petroleum dealers said.

Both consumers and unscrupulous elements find a price difference of up to Rs 7 a litre lucrative enough, and diesel vehicles, particularly long-distance trucks save on an average up to Rs 5,000 on the fuel in a trip, they said.

Pump prices of petrol and diesel across the country are market-determined and attract uniform central excise duty, but their prices differ from state to state because of wide variations in the local levies or value-added tax (VAT).

In oil retail economics, diesel is the most important fuel in terms of revenue income for both dealers as well as the exchequer because of high sales volume compared to petrol, executives and dealers mentioned above said requesting anonymity.

Delhi and Rajasthan markets became uncompetitive after the two states raised VAT on auto fuels sharply compared to their neighbouring states to mop up additional revenues to fight the slump during the Covid-19 lockdown, they said.

This has paved way for sales shifting to neighbouring border cities where prices are Rs 5 to Rs 7 per litre cheaper, said petrol pump dealers.

“A diesel-run car registered in Delhi saves at least about Rs 250 if it gets tank full in Gurgaon [Gurugram] and for long-distance trucks that have double fuel tanks easily save up to Rs 5,000 at one go,” Nischal Singhania, a Delhi-based dealer and former president of the Delhi Petrol Dealers Association (DPDA), said.

“Smuggling of diesel is now rampant. Double-tank trucks coming from Punjab bring diesel and sell it locally. They make about 2,500-3,000 in one trip as the price difference is very high,” Meerut-based Hemant Sirohi, who is also an active member of the Empowering Petroleum Dealers Foundation (EPDF), said.

The diesel price difference between Delhi and Mohali in Punjab is Rs 7.49 a litre.

“This is not all. Inter-state smuggling of diesel is rampant as it is one of the essential commodities and pass the borders easily. This is happening under the garb of a new initiative of door-to-door fuel delivery. Diesel is being carried in barrels and tankers from Gurgaon [Gurugram] to Jaipur as the price difference is Rs 7.44 per litre,” Sirohi said.

An oil ministry official said requesting anonymity that the government was yet to receive any formal complaint in this regard.

“It is believed that OMCs (oil marketing companies) are keeping a watchful eye on these illegal developments and take appropriate action. The government may also seek an explanation from OMCs,” he said.

The oil ministry spokesperson declined comments.

State-run OMCs—Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL)—did not respond to the queries.

Government official and oil companies’ executives said the price distortion is due to variations in state-level tax rates as VAT in Delhi and Rajasthan are very high.

The Delhi government had almost doubled VAT on diesel on May 5 from 16.75% to 30% that also attracts an additional Rs 250 per kilolitre air ambience charges. VAT on diesel in Rajasthan was raised to 28% from 22% in addition to Rs 1,750 kilolitre road development cess. One kilolitre is equal to 1,000 litres.

Although other states have also raised VAT rates on auto fuels, they calibrated the levy in such a way that the consumer prices would remain competitive compared to neighbouring cities of border states.

According to the latest date of the oil ministry, state-level tax on diesel in Haryana is 16.4% or Rs 9.20 per litre, whichever is higher, plus 5% additional tax on VAT.

Punjab levies 15.15% VAT, plus 10% additional tax on VAT, Rs 1,050 per kilolitre cess and 10 paise per Litre urban transport fund. The VAT rate on diesel in Uttar Pradesh (UP) is 17.48% or Rs 10.41 per litre, whichever is higher.

Effectively, on June 8, diesel was sold at Rs 71.54 per litre in Jaipur (Rajasthan), Rs 70.59 a litre in Delhi, Rs 64.89 a litre in Ghaziabad (UP), Rs 64.10 a litre in Gurugram (Haryana), and Rs 63.10 in Mohali (Punjab).

Experts said the problem will continue unless states levy a uniform tax on the fuel, which is only possible if petrol and diesel are brought under the Goods and Services Tax (GST) net.

“The rate arbitrage between the neighbouring states has always resulted in this problem for various goods like diesel/petrol and liquor (currently under VAT) and mobile phones, etc. (prior to GST),” Abhishek Jain, tax partner at consultancy firm EY India, said.

“It is difficult to control/deter these prevalent practices unless a uniform rate is implemented for products still under VAT. For products under GST (since the rate is uniform across all states) this problem has been taken care of,” Jain added.

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