India is all set to announce a steep hike in petrol and diesel prices, the second hike in four months this year, due to rising global crude tags that have risen to over $130 a barrel.

The government dilly-dallied for almost a week, as oil companies threatened to ration fuel supply to motorists, citing cash shortage to import crude beyond a few months. The state-owned oil companies have also been incurring losses to the tune of crores of rupees every day, thanks to heavily subsidised fuel in the country.

While there has been no political consensus as to how the government should help cut the losses of the PSU oil companies while ensuring that the common people are not burdened by higher petroleum prices, Union Finance Minister P Chidambaram announced that there will be no cess on income-tax to fund fuel subsidy.

But the all-too-important question remains unanswered. How to solve this imbroglio? Hike fuel prices and put pressure on the common people and inflation? Will the hike be enough to offset the losses? What will happen to the country's petroleum sector if the oil PSUs continue to reel under heavy losses?

The Communist Party of India (Marxist), which has vehemently protested any increase in fuel prices, believes it has a plausible solution. Following is the statement issued by the Left:

The profits enjoyed by private oil companies in the country have increased along with increase in oil prices. Due to the selective policy of the government, private sector companies, both in upstream and downstream, are enjoying windfall profits arising not due to extra business acumen or competitive business approach but due to the high global crude price.

With crude oil prices now exceeding $100 per barrel, it is necessary that windfall gains be recovered from all the private and joint venture oil producing companies like Cairns, Reliance [Get Quote], Essar etc extracting oil and gas in India.

When these contractors participated in the New Exploration Licensing Policy, none of them could have envisaged crude oil prices beyond $30 per barrel. It would be a failure on the government's part to allow upstream contractors additional gain of $70 - $80 per barrel without any extra work. Many other countries have gone ahead and re-negotiated their contracts with a threat of imposing windfall taxes on such profits.

It is time that the Government of India takes charge and recovers unintended gains from upstream contractors.

Similarly, private sector refineries have been allowed to keep margins for refining cost exceeding $15 per barrel while public sector companies struggle to meet their financial requirements. For example, for a private refinery like Reliance, which exports a major portion of its products, the profit has increased by 26 per cent during the quarter October-December 2007 and 35 per cent during January-March, 2008 as compared to the same period during the last financial year.

By design the government has dragged down the public sector companies while private sector companies have been allowed to flourish. It is necessary that the government impose a windfall tax on private refineries, who do not contribute to meet the oil subsidy bill.

Why no Windfall Profits Tax?

A windfall profits tax is a tax on profits that ensues from a sudden windfall to a particular company or industry.

In 1980, in the United States, federal legislation was passed that levied such a tax on oil companies because of the profits they earned as a result of the sharp increase in oil prices brought about by the Arab oil embargo. Since then, the tax has not been re-enacted.

However with oil prices once again reaching record levels there is renewed pressure on the US government to bring back the tax.

Amid low oil prices, the tax was ended in 1988 by President Ronald Reagan. Recently, on May 7, 2008, a Democratic Senator introduced a Bill "The Consumer-First Energy Act of 2008", which would create a tax on "windfall profits" on the major oil companies.

The government should impose a "windfall" profits tax on private/joint venture oil producing companies and private stand alone refineries earning huge profits through import parity policy of pricing.

In no case can the UPA government pamper the private oil companies to make windfall profits and at the same time increase the price of petrol and diesel and burden the people further when they are suffering from steep price rise of essential commodities.

Reduce customs and excise duties

This along with the reduction of customs duty on crude oil and reduction in excise duty of petroleum products without any ad valorem content should help to meet the situation arising out of the steep rise in world oil prices and providing relief to the oil marketing companies.

• Customs duty on crude oil should be cut from 5 per cent to nil. The duty collected on this account is likely to be more than Rs 15000 crore (Rs 150 billion) this year, which if nullified would give considerable relief to the oil marketing companies.
• Creation of a Price Stabilisation Fund by using the money collected through cess by the government on crude oil produced by ONGC [Get Quote] and Oil India, the two oil producing PSUs (Rs. 2,500/MT) for supporting OMCs. This cess amounts to more than Rs. 7,500 crore (Rs 75 billion) approximately per annum.
• Reduction in excise duty of products. The duty should be specific without having any ad valorem content.