Transport Tax to Stay, Fuel Excises to Rise

MTOil companies said fuel prices will definitely rise, as margins are too thin to absorb the 3 ruble per liter increase.

The government has decided to continue charging a reduced transportation tax while raising excises on gasoline by 3 rubles (10 cents) per liter over the next three years, Vedomosti has learned.

During a meeting chaired by Prime Minister Vladimir Putin on Sunday, it was decided that excise taxes on gasoline will rise by 1 ruble per year in 2011, 2012 and 2013, a source in the government administration and an official familiar with the results of the meeting told Vedomosti.

The Finance Ministry proposed raising the tax by 2 rubles next year and 1 ruble in 2012, but since it was decided to keep the transportation tax, the fuel increases will be gradual, one of the sources said.

Putin requested that the government consider keeping the transportation tax, a Finance Ministry official said, adding that the tax should be reduced to prevent a sharp rise in costs for car owners.

So far, there are two options: reducing the transportation tax's base rate or introducing breaks for certain groups of people, the Finance Ministry official said. The ministry is preparing calculations based on both scenarios and will present them to Putin and President Dmitry Medvedev soon.

Putin's press secretary, Dmitry Peskov, confirmed that the meeting was held but declined to comment on its results. The government administration source said a final decision would be made at a Presidium meeting July 29.

Deputy Prime Ministers Sergei Ivanov and Alexei Kudrin, who also heads the Finance Ministry, supported the cancellation of the transportation tax starting next year to compensate for higher excise taxes on fuel.

Some drivers are rarely behind the wheel, but the transportation tax is paid by all car owners, Ivanov said, whereas after the reform, the cost would be based on the amount of fuel consumed. The Transportation Ministry also supported the proposal, but asked that revenue from the excise tax be added to dedicated road funds to finance construction work and renovations.

Medvedev, however, recommended that the government reconsider canceling the transportation tax.

The excise tax per metric ton of 92-octane and 95-octane gasoline is identical — 3,992 rubles ($128.70), given the average refinery prices on June 23 of 23,842 rubles and 26,306 rubles, respectively, according to research firm Kortes.

For a liter of gasoline — which weighs about 750 grams — the tax works out to about 3 rubles to 3.5 rubles. Thus, raising the tax by 3 rubles over three years would essentially double the tax burden, said Mikhail Turukalov, an analyst at Kortes.

Doubling the current excise on diesel fuel, now 1,188 rubles per ton, would add about 1 ruble to the cost per liter, he said.

If the excise were increased by just 1 ruble, it could be included in the fuel's price, said a source at an oil company, but if the excise tax is doubled, that would be harder to pass on to consumers, he said. Demand could fall and the Federal Anti-Monopoly Service could take issue, the source said.

Fuel prices will definitely increase because there is no way to hide 3 rubles given the margins between wholesale and retail prices, said a source at a second oil company. He also said he was concerned about the anti-monopoly service's reaction.

A spokesperson for Rosneft said the company would act on market conditions. Spokespeople for TNK-BP, LUKoil and Gazprom Neft declined comment.

Raising fuel excise taxes and keeping the transportation tax is a politically risky decision ahead of elections, said Vyacheslav Lysakov, who heads the car owners' movement Svoboda Vybora, or Freedom of Choice.

"It would have been better not to make any public promises than to go back on their word now and look for justifications," he said.

Producers' rising costs are being offset by the low growth rates of people's income, said Yevgeny Gavrilenkov, chief economist at Troika Dialog. In years past, when salaries were rising quickly, cost growth — including for fuel — was immediately visible in retail prices. Now, that is no longer the case, he said.

According to Transportation Ministry calculations, boosting the fuel excise tax by 3 rubles will bring transportation costs to between 10.4 percent and 15.6 percent of goods' total cost, compared with 10 percent to 15 percent now.

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