Even as the union government mulls a new policy to rein in surging petrol and diesel rates, fuel prices were hike for 11th straight day on Thursday, taking the retail price for petrol in Mumbai to over Rs 85 per litre. After Karnataka polls, the overall increase in the prices of petrol has been Rs 2.84 per litre whereas diesel has gone up by Rs 2.60 during the same period.

The oil marketing companies had put a 19-day freeze on fuel prices in the run up to Karnataka elections. In a bid to assuage the rising public anger over simmering cost of auto fuels, Law Minister Ravi Shankar Prasad indicated that the government may dump the current system of daily changes in petrol and diesel prices to shield consumers from the volatility in global markets and go in for a new policy which takes a long-term view on pump prices of the two fuels.

"The government is keen that instead of having an ad hoc measure it may be desirable to have a long-term view which addresses not only the volatility but also takes care of the unnecessary ambiguity arising out of frequent ups and downs. That process is underway," Prasad said at a news conference.

Opposition leaders have criticised the government for failing to rein in rising fuel prices which have now turned into a political hot potato. The BJP-led government had in June last year junked a 15-year-old practice of revising rates every fortnight and introduced daily revisions which worked well when international oil prices were low. However, with global oil prices scaling the $80 per barrel mark the market has turned volatile and consumers are at the receiving end.

Amid soaring crude oil prices, there have been reports that the government may levy a windfall tax on oil producers like Oil and Natural Gas Corp (ONGC) as part of a permanent solution for moderating the spiralling retail prices of petrol and diesel.

The tax, which may come in form of a cess, will kick in the moment oil prices cross $70 per barrel, sources privy to the development told PTI.

Under the scheme, oil producers, who get paid international rates for the oil they produce from domestic fields, would have to part with any revenue they earn from prices crossing $70 per barrel mark.

The revenues collected from upstream oil companies would be used to pay fuel retailers so that they absorb spikes beyond the threshold levels.

This may be accompanied by a minor tinkering with excise duty rates to give immediate relief to consumers. States too would be asked to cut sales tax or VAT to show a visible impact on retail prices.

Sources told PTI the thinking in the government is to levy cess on all oil producers - both public and private sector - so as not to attract criticism of stifling state-owned explorers. A similar tax was considered in 2008 when oil prices were on the rise but the idea was dropped after stiff opposition from private sector firms like Cairn India.

Windfall tax, they said, is levied in some of the developed countries globally. The UK in 2011 raised the tax rate to be applied to North Sea oil and gas profits when the price is above $75 per barrel.

China on April 1, 2006, began levying the special upstream profit tax on domestic oil producers to redistribute and allocate the windfall income enjoyed by the oil companies and subsidise disadvantaged industry and social groups that are most affected by soaring crude oil prices. It in 2012 raised the windfall tax threshold to $ 55 per barrel.

Sources said the windfall tax is one of the options being considered by the government as a permanent solution to dealing with the problem of spike in oil prices.

This follows reluctance on part of the finance ministry to cut excise duty as it has to ensure adequate funds are available to social welfare schemes in the election year. In particular, resources have to be arranged for the National Health Protection Scheme (NHPS) that aims to provide health insurance cover of Rs 5 lakh to every eligible household.

with PTI inputs