A large and recent surge of petrol and diesel prices in Bhutan has not only increased transportation rates, but is having a knock on effect on all other commodities from food to construction materials.
The price of petrol in Thimphu is 95.21 and diesel is 100.5 while it is 92.79 for petrol in Phuentsholing and Nu 98.40 for diesel as of 31 March 2022.
No Indian taxes but still high prices
Bhutan imports its fuel from India, but as a sovereign country it does not have to pay the Indian Central government excise duty and the state government Value Added Tax which make up around 50 percent or more of the fuel cost at the pump in India.
Real cost of fuel in India
This should mean that the fuel price in Bhutan should be around half of that in India, without the above taxes for Indian consumers, but the reality is that this is not the case as we pay almost comparable rates for fuel.
For example, there are three major Indian Public Sector Undertaking oil companies supplying oil to Bhutan which are Bharat Petroleum Corporation Limited (BPCL), Indian Oil Corporation Limited (IOCL) and Hindustan Petroleum Corporation Limited (HPCL).
On 16 March 2022 the base price at which IOCL sold petrol to pumps in Delhi are INR 48.24 including refining and freight charges.
Then the central government excise duty was INR 27.90, state government VAT was INR 15.50 and the dealer commission was 3.77 per liter. This brought the final price to INR 95.41 per liter.
On 16 March 2022 BPCL sold diesel at the base price of INR 49.62 to pumps in Delhi. Then came INR 21.80 in central taxes, INR 12.68 in VAT and INR 2.57 in dealer commission leading to a total of INR 86.67.
These are the prices and breakdown given on the IOCL and BPCL websites.
On the same day in Thimphu at midnight petrol touched 95 and diesel crossed 100.
Fuel should be much cheaper in Bhutan
Consumers in Bhutan only have to pay the 5 percent Bhutan sales tax, 5 percent green tax and a dealer commission of 1.5% which is a total of 11.5% only on the non-taxed fuel coming from India.
Earlier there was an excise duty component too but in 10 November 2017 the former government decided to do away with the excise duty charged on oil and slashed oil prices by Nu 10.29 per liter for petrol and Nu 7.75 per liter for diesel in Bhutan.
By simple common sense fuel in Bhutan should be cheaper, but the reality is not so as it appears that the PSU companies are keeping a huge margin for themselves when it comes to Bhutan almost equivalent to the taxes paid by Indian citizens.
For example, if the BPCL petrol price of 48.24 was slapped with 11.5% total taxes then petrol to Bhutan should be sold at Nu 53.667.
The price of transporting 1 liter of petrol in mountainous territory from Phuentsholing to Thimphu is Nu 2.42 per liter.
Though it should be much cheaper in the plains even if we apply the same mountain road rate to transport the same 1 liter of petrol from Siliguri to Phuentsholing at around 150 km ,then it is another Nu 2.42.
So the final price to Bhutan should be Nu 53.66 per liter of petrol inclusive of local taxes plus around Nu 5 of transportation coming to a total of Nu 58.66 with another Nu 1.40 thrown in for any other additional charges and the total cost should not be more than Nu 60 per liter at the pump in Bhutan for petrol and not Nu 95 like now.
Where is the difference going?
The big question is where is this additional Nu 35 per liter going when oil coming to Bhutan is not imposed with any of the heavy Indian taxes.
This paper raised this matter with the Minister of Economic Affairs Lyonpo Loknath Sharma in November 2021 and according to a source in the MoEA, Lyonpo tasked the Department of Trade to look into it.
After enquiries by the Department over three months including writing through the Foreign Ministry and several calls, the oil PSUs assured that they are not charging Bhutan any of the Indian taxes, but instead justified the high cost charge to Bhutan as part of various costs from refining to transport.
However, when the Department asked for the break up of all the costs, heads and inputs the oil companies declined to share it.
An official said as per the latest information the oil companies told them that as of 27 March 2022 the crude landing price in Delhi is INR 57.58 and then the operation, logistics cost is added along with their margin which another INR 11 to INR 13 with means INR 68 to 71 per liter.
Then the oil companies claimed a transportation cost and other charges of INR 13 to 15 per liter to bring it to the Bhutan border which means the fuel comes to Phuentsholing at INR 84 to 86 per liter.
The official said that Bhutan was being charged the ‘export price’ by the oil companies in India.
The official, who appeared to be convinced by the explanation of the Indian companies over the phone, said that oil pricing is very complex and Bhutan does not produce any oil and so it has to import from India which in turn imports around 80 percent of its oil.
The official said that apart from the rising prices the other issue is the depreciating value of the INR against the dollar. The official said apart from buying the raw crude, there are transportation costs for the crude to the sea ports, refining it and other transport costs from there. The oil companies also mentioned a ‘lending cost.’
The official said that Bhutan will not be charged the ex-factory price but the oil companies keep a profit margin and also the cost of delivery to the border.
The official said that even state owned companies in Bhutan like NRDCL, STCBL etc will not sell their products at the production cost but will keep a profit margin.
The Department will report to the MoEA Minister on its findings.
Holes in the Oil Companies explanations
While the Oil companies made several claims on why it was charging Bhutan such high rates, however, many of their claims do not hold water.
The international Brent crude oil is USD 104 per barrel as of 1 April 2022. A barrel is 159 liters. With the INR at 75.97 to the dollar the price will be INR 7,900.88 per barrel or Nu 49.69 per liter of crude oil.
The international transport and refinery cost is minimal given the huge bulk transported via shipping that drops the unit price and also the same for the refinery costs.
As per several fuel price sources, online and news sites in India the price to transport crude oil, process it, refinery margin, logistics, operational costs range from around Nu 4 to Nu 10 per liter even with a generous estimate.
So now the price of petrol is INR 54 to INR 60 per liter ready to be sold to petrol pumps.
Volta Oil company in USA estimates that the refining cost of fuel is 0.40 to 0.70 dollar per gallon in the USA which is INR 30.36 to INR 53.13 per gallon or INR 0.13 per liter to INR 0.33 per liter.
A lot is made about transportation prices to Bhutan, but in reality neighboring Assam including Bongaigaon has three refineries including oil fields and there is also a major refinery at Haldia in West Bengal. As explained above, a lot of the oil to Bhutan comes from Siliguri which is not far from Phuentsholing.
In fact, the Assam refinery of Numaligarh owned by BPCL supplies cheaper oil to Nepal which is more far away than Bhutan.
The Volta Oil company in USA says the cost of distribution from the refinery to central distribution points and then pumps in USA is 0.27 USD per gallon or INR 20.49 per gallon coming to INR 0.12 per liter.
Internationally Oil companies make a very narrow margin on oil transportation and refining so the high costs charged to Bhutan do not make sense.
The fact that the companies are not willing to give a break up of their costs or charges for Bhutan is suspicious by itself.
The dollar rate, lending rate, operations rate, profit margin, logistics etc is irrelevant as it should already be covered in the Nu 4 to 10 per liter shown above.
A Twitter handle called Stats of India which gives out important statistical data on India quoted the oil prices data from the Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas of the Indian government on 22 March 2022.
It said that if you buy INR 100 worth of fuel in India around 45 to 50 percent is collected as taxes by the Central and State governments in India.
This means the actual price of fuel after the refining and others costs is around INR 45 to INR 50.
What about Nepal?
Apart from Bhutan, another country in the region that buys oil from India is Nepal. However, the oil sold to Nepal is at a much cheaper rate than to Bhutan.
Nepal’s state owned Nepal Oil Corporation (NOC) buys the oil from Indian companies. In November 2021 the NOC bought oil from India at INR 52.78 (Nepal Currency Rs 83.79).
It then imposed its own tax of INR 36.36 on petrol and another INR 6.3 as infrastructure development tax.
This means that around 43% of the fuel price in Nepal is to do with local taxes in Nepal.
In March 2018 when oil was even cheaper Nepal bought oil from India at INR 33.50 but imposed its own taxes of INR 37.6. So when oil is cheaper Nepal’s tax is around 50 percent of the oil cost.
As per the NOC website the 31 March 2022 price of petrol in Kathmandu, Nepal is INR 97.65. Of this around 43% would be local taxes.
In the case of Bhutan, the petrol price in Thimphu is 95.21 but only 10% are local taxes.
This means that the same oil sold to Bhutan by the same companies is much more expensive than when it is sold to Nepal.
Oil is Bhutan’s biggest import and the country could save billions every year if it can get a better price.