Cen­tre’s push for GST in petrol, diesel spells trou­ble


Four states might have cut the value-added tax (VAT) on petrol and diesel, but states’ re­luc­tance to al­low fuel in the goods and ser­vice tax (GST) regime can be ex­plained by the fact that the av­er­age rate at which 29 states and seven Union Ter­ri­to­ries taxed petrol was 28 per cent and diesel 19 per cent. Con­sumers are pay­ing state levies at the high­est GST rate al­ready. Over and above th­ese rates, cen­tral levies are ~19.48 on one litre of petrol and ~15.30 on a litre of diesel.

If the states go by Fi­nance Min­is­ter Arun Jait­ley’s call for low­er­ing the VAT on fuel by 5 per cent, the in­ci­dence of the com­bined state and cen­tral taxes will still be well above what can be charged un­der the GST. The av­er­ages are based on the Min­istry of Pe­tro­leum and Nat­u­ral Gas data, prior to the re­cent cuts in VAT rates by Gu­jarat, Hi­machal Pradesh, Ut­tarak­hand, and Ma­ha­rash­tra.

Af­ter the Oc­to­ber 4 ex­cise duty cut, petrol cost ~68.50 a litre in Delhi on Wed­nes­day, of which the tax com­po­nent was ~34, or half of the con­sumer price. Of this, ~19.48 goes to the Cen­tre through var­i­ous ex­cise du­ties, and ~14.5 to the state, in the case of Delhi, in the form of VAT. On the re­tail sell­ing price of diesel at ~57, the Cen­tre earns ~15.30, while the state earns ~8.40 per litre. Thus, petrol is ef­fec­tively taxed at 100 per cent, while diesel at 70 per cent, in­clu­sive of both Union ex­cise and state VAT, in Delhi.

In the event petrol and diesel are brought un­der the GST with­out con­sid­er­ing the rev­enue im­pli­ca­tions, con­sumers stand to gain, but only in the short term. Even though the tax in­ci­dence at the high­est slab, in­clu­sive of a cess of 15 per cent, will come down to 43 per cent, the very na­ture of the ad-val­orem (per­cent­age) duty struc­ture will be cas­cad­ing when prices go up. Cur­rently, the Cen­tre charges a fixed tax rate, though state VAT is a com­bi­na­tion of ad-val­orem and fixed rates.

As­sum­ing a GST rate of 43 per cent on petrol and diesel, the re­al­i­sa­tion of tax by the Cen­tre (in ~ per litre) would come down by 49 per cent for petrol and by 37 per cent for diesel, ac­cord­ing to es­ti­mates. Ap­prox­i­mat­ing it to 40 per cent, the rev­enue to the Cen­tre from sale of petrol and diesel will de­cline from the bud­geted ~3.4 lakh crore to ~2 lakh crore. This would bring down the re­tail price to nearly ~50 a litre, ap­prox­i­mately for both the fu­els at Wed­nes­day’s rate.

Con­sumers will, how­ever, con­tinue to be ex­posed to global price fluc­tu­a­tions since the base prices of diesel and petrol are bench­marked against global rates on a trade par­ity ba­sis (a weight of 80 to im­ports and 20 to ex­ports). Be­sides, any change in the tax rate to cush­ion the con­sumer or in­crease rev­enue for the govern­ment will be more dif­fi­cult un­der the GST. Though the pe­tro­leum sec­tor is un­der the GST regime, five items — diesel, petrol, nat­u­ral gas, crude oil, and avi­a­tion tur­bine fuel — have been kept out. The GST Coun­cil has put on hold any de­ci­sion on th­ese be­cause of the rev­enue im­pli­ca­tions for both the Cen­tre and the states.

The in­di­rect tax col­lec­tion of the Cen­tre from the sale of petrol and diesel was es­ti­mated at ~3.4 lakh crore in 2017-18 and af­ter a ~2 ex­cise duty re­duc­tion on Oc­to­ber 4, it is ex­pected to fall short by ~13,000 crore. As­sum­ing states and the Cen­tre agreed to bring the two fu­els un­der GST and charge a rate that was rev­enue neu­tral, that rate would need to be above 100 per cent, said Kirit Parikh, who chaired a com­mit­tee on pe­tro­leum pric­ing that formed the ba­sis of de­con­trol of petrol prices in 2010.

Parikh warned against in­clud­ing fuel in the GST in haste. “It is good for oil mar­ket­ing com­pa­nies and also brings uni­for­mity in state tax­a­tion, but the rev­enue of both the Cen­tre and the states will go down by 50 per cent. There will be chaos,” he said. A tran­si­tional road map needed to be evolved, he added.

Ma­ha­rash­tra Fi­nance Min­is­ter Sud­hir Mun­gan­ti­war said, “We do want petrol and diesel to come un­der GST, but not in haste. We need our rev­enues to im­prove state ex­pen­di­ture, and fuel VAT has been a ma­jor source of rev­enue, which we can­not af­ford to com­pro­mise at this junc­ture.” Both Ma­ha­rash­tra and Gu­jarat, ruled by the Bharatiya Janata Party, have, how­ever, been sup­port­ive of bring­ing the en­tire pe­tro­leum sec­tor un­der the GST regime.

Among states, Tamil Nadu has been vo­cal in its op­po­si­tion to the move be­cause it fears a po­ten­tial drop in its own tax rev­enue. In a GST regime where big man­u­fac­tur­ing states face the prospect of com­pen­sa­tion from the Cen­tre in case of rev­enue loss due to the GST re­plac­ing VAT, giv­ing up the au­ton­omy to tax fuel, whose de­mand is price in­elas­tic, is not what they re­ally want. “We earn about 40 per cent of our own tax rev­enue from taxes on fuel. How can we let that go?” asked a Tamil Nadu govern­ment of­fi­cial.

The bench­mark In­dian crude oil bas­ket has nearly dou­bled from its low­est rate of $28.3 a bar­rel in Jan­uary 2016 to $55 in Oc­to­ber 2017, though pe­tro­leum prod­uct pric­ing is not di­rectly linked to it and is de­ter­mined on the ba­sis of re­spec­tive global bench­marks.

The Cen­tre earned ~3.3 lakh crore in the form of var­i­ous ex­cise du­ties from the sale of petrol and diesel in 201617 (re­vised es­ti­mate), a 150 per cent rise in three years from ~1.3 lakh crore in 2013-14 as a re­sult of the in­crease in ex­cise duty dur­ing the low pe­tro­leum price phase.

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