Should Petrol and Diesel Fall Under GST?

Ever since the enactment of the 122nd Constitution Amendment Act in 2016, the Goods and Services Tax (GST) Council has emerged as one of the most powerful decision-making bodies in India. Last week, the Council convened its 45th meeting — the first physical meeting in 20 months which had been affected by the COVID-19 lockdowns.

One of the most important agendas in the meeting was to discuss the possibility of bringing petroleum products under the ambit of the GST (or the indirect tax regime).

While it is widely believed that doing so would reduce the retail costs of these products significantly, many state governments have protested against such a move.

For now, the states seem to have come on top after the Finance Minister announced that there is no immediate possibility of including petrol and diesel under the GST framework. But the media speculation over the emergent need to do so on account of soaring prices of fuel across the country continues.

Let’s see about the arguments of both sides and what lies at stake.

The Boil Over Oil Revenues

When GST was originally introduced in 2017, five of the items that were purposely kept out of its purview included crude oil, natural gas, petrol, diesel and aviation turbine fuel (ATF).

Why? Because both the Central and state governments depend heavily on the revenue generated from these items via excise duty and value added taxes (VAT) among others. Each state has its own taxation structure for petrol and diesel. In a way this has resulted in India having one of the highest tax rates on fuel in the world.

Consider Delhi, for instance. This is the current taxation framework for petrol and diesel in the NCT of Delhi:

Apart from the tax components, there are a number of other variable costs entwined into the price of petrol like freight charges, dealer commissions, exchange rates etc. The fluctuating crude prices add more dynamism and instability to the price. By the time fuel reaches retail hands, a customer in India pays in the vicinity of 50% of the retail price in taxes alone (more or less across states on average).

Moreover, the rise in these taxes has been somewhat constant and unabated. The central excise duties on petrol and diesel have risen by almost 88% and 209% in the last six years respectively. The Government has collected more than ₹94,000cr ($12.7bn) on petrol and diesel via central excise duties in Q1FY22 alone.

In fact, the average share of petroleum duties in the total gross revenues fetched by the Centre is close to 12% (between 2017–18 to 2020–21).

FYI: It has been determined that the Centre has the room to reduce taxes on fuel by ₹4 at the most to ease inflationary pressures without experiencing revenue losses.

Similarly, the VAT component on fuel taxes is large enough to sweeten the pie of revenues for the states. In case the GST framework is applied to petroleum products, it would mean the imposition of a uniform 28% tax rate across the board. So, not only do the states lose their revenue (by a lot), they also lose their discretionary powers of taxation, something that would play at odds with the federal set-up of governance.

Taxation with Oil Representation

Fuel prices have increased to exorbitant highs over the past few months owing to a host of factors — rise in crude oil prices, post-pandemic production boom, steep rise in demand etc. The call to reduce tax rates, therefore, has grown louder amidst the ongoing price escalation. A number of stakeholders starting from the industry to the judiciary have been pressing for a revision of the tax rates on fuel.

But there are quite a few challenges down that road.

The most prominent is the question of tax distribution among the governments. If there is one thing Indians learnt from the GST, it’s that the revenue-sharing arrangement between the Centre and states is prone to all manner of problems.

Let’s even set aside the GST-compensation issue for a moment. As per the Finance Commision rules, the Centre’s levy from excise duties is to be shared with the state governments (as per set formulae) but the cess and surcharges aren’t. The ratio of excise to cess/surcharge revenue between the Centre and states was 90:10 in 2014. Now, it’s 4:96.

This means that less than 4% of the fuel-related duties now fall under the shared pool for the states to pick. Under such circumstances, if their share was reduced further by, say, a flat-28% GST application, that would not only be a massive blow to the state coffers but also to their fiscal autonomies.

The other issue is with the state-wise competition for revenue. Considering that GST is a consumption-based tax, bringing petroleum products under its ambit would mean that states where they are sold get more revenue over states which drive their production.

Meaning that states like Uttar Pradesh, West Bengal, Bihar etc., with their large retail markets and thus high consumption would bag a chunk of the revenues while states like Gujarat, Assam, Tamil Nadu etc., being the production centres of petroleum, would be left behind.

This is discounting the additional tax that production centres have to pay for the industry and import of petroleum.

One Nation, Thirty-Six Taxes

GST may have been an era-defining framework but irrespective of the unifying taxation regime it brought, its advent chipped away at the states’ fiscal rights to some extent. The exclusion of petroleum products from GST purview could thus be seen as the last straw in the expansive GST regulation which the states are biting down hard on to prevent any further erosion of autonomy in revenue generation.

On top of it, the changing matrix of revenue-sharing between the Centre and states has fanned the concerns even further, especially in the non-BJP states. There has been some talk about bringing petrol and diesel under a “maximum luxury slab of GST”. This means levying a standard SGST/UTGST rate at the higher end of the margin (possibly > 28%) across all states to offset the VAT and surcharge losses, if, at all, fuel was brought under the GST framework.

However, when rising public discontent is weighed against constitutional autonomy, it becomes clear that balanced retail fuel prices backed by a low-tax regime outscore depleted treasuries by a mile. A survey conducted by LocalCircles testifies to this by revealing that 77% Indians want petrol and diesel to come under the GST purview as they continue to struggle with rising fuel costs.

In any case, with the Council dismissing any such possibility for now, the debate over this issue is presumed to continue. One can only hope the resolution comes sooner rather than later in view of the spiralling fuel prices and the spiralling retail commodity prices, by consequence.

(Originally published September 21st 2021 in transfin.in)