Why GST on petrol, diesel may not mean cheap fuel

THE NEED TO COM­PEN­SATE STATES FOR LOSSES WOULD IN­VOLVE THE LEVY OF A CESS, EX­PLAIN HY­DRO­CAR­BON AND FI­NAN­CIAL EX­PERTS

Resource Digest - - CONTENT -

Con­trary to pop­u­lar no­tion, bring­ing petrol and diesel un­der the Goods & Ser­vices Tax (GST) regime may not make them sig­nif­i­cantly cheaper. There is grow­ing pres­sure on both the Cen­tre and the States to lower taxes on the two fu­els and bring them un­der GST. How­ever, a greater chal­lenge be­fore the GST Coun­cil will be fit­ment of tax rates for them. If 28 per cent GST is levied, petrol in Delhi will cost Rs. 43.52 a litre, down from the cur­rent Rs. 70.46, and diesel will cost Rs. 42.17 a litre (cur­rently Rs. 58.70). How­ever, things may not play out quite this way.

28% GST SLAB

Traders and an­a­lysts be­lieve that GST will bring down re­tail prices by only about Rs. 4-5 a litre, as there will be a cess on top of the 28 per cent GST in or­der to com­pen­sate the States and the Cen­tre for their rev­enue losses.

“Petrol and diesel are not sin (lux­ury or de­merit) prod­ucts, and yet the GST rates for them have to be at the high­est cat­e­gory, that is, 28 per cent. Var­i­ous cesses will be added to this to en­sure that the States are com­pen­sated,” says a se­nior oil com­pany ex­ec­u­tive.

Taxes on auto fuel are a dou­bleedged sword for the gov­ern­ment right now. If the taxes are re­duced, it would make a deep dent in the States’ fi­nances and strain the Cen­tre’s purse. But if prices don’t come down, it will dent the vote bank. There is a be­lief that the cur­rent flare-up in fuel prices can be ad­dressed by cor­rect­ing the tax struc­ture: the Cen­tral Ex­cise Duty (which is spe­cific) and the Value Added Tax (VAT) by the States, is ad-val­orem.

The fi­nal call will be with the GST Coun­cil but it seems far­fetched, say of­fi­cials in the gov­ern­ment.

The cur­rent price spike, which has hurt con­sumers, has been to the gov­ern­ment’s ad­van­tage, more than oil com­pa­nies. The base price of petrol and diesel since 2014 has in­creased only by Rs. 2-3 a litre. What has in­creased is the tax com­po­nent on these prod­ucts. Since 2015, the ex­cise duty on petrol has been hiked by Rs 11.77 per litre and on diesel by Rs. 13.47.

HIGHER VAT COM­PO­NENT

The VAT com­po­nent, which is levied by the States, is as high as 48 per cent in Ma­ha­rash­tra (Mum­bai) for petrol; for diesel it is 38 per cent in Mad­hya Pradesh.

A se­nior BJP mem­ber said, “It is un­likely that the States – whether Bjp-ruled or non-bjp — will agree (to waive the VAT com­po­nent) as many of them are sig­nif­i­cantly de­pen­dent on rev­enues from these two prod­ucts.

“And if they are brought un­der GST, the States will seek com­pen­sa­tion for the losses; you can­not ex­pect the States to re­design their rev­enue earn­ing sources overnight.”

All GST will do is bring uni­for­mity in taxes; it will not mean taxes will come down down, an­other oil ex­ec­u­tive said.

Harpreet Singh, Part­ner, KPMG, said, “Since the cur­rent tax in­ci­dence on petrol and diesel is quite high, the gov­ern­ment can put the prod­ucts in the 28 per cent slab and levy an ad­di­tional cess. This will be sim­i­lar to the case of de­merit goods such as to­bacco and lux­ury cars and will lower the im­pact on the ex­che­quer when the prod­ucts are brought un­der GST.”

Singh said that re­finer­ies’ bot­tom­lines have been hit by the in­put credit build-up. “The tax of ser­vices has gone up from 15 per cent to 18 per cent af­ter GST.”

“But this can­not be off­set against out­put as petrol and diesel are not un­der the GST regime,” he ex­plained.

TAXES ON AUTO FUEL ARE A DOU­BLE-EDGED SWORD FOR THE GOV­ERN­MENT RIGHT NOW

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