Covid-19 may prompt states to hold on to revenue sources outside GST

Given the states limited capacity to mobilise revenues, it will be difficult to bring oil, fuel and tobacco under the purview of GST in the near future

Over the past few days, a number of states have taken advantage of tipplers flocking to reopened liquor outlets by increasing tax levied on alcohol. On Monday, Delhi announced a 70 per cent ‘Corona’ levy on alcohol. This was followed by Karnataka on Wednesday, as it hiked the excise duty on alcohol to 17 per cent.

Meanwhile, petrol and diesel prices have been raised in 14 states, including Delhi, Rajasthan and Karnataka, since late March.

These actions just go to shows how important items outside the goods and service tax (GST) like petroleum products, tobacco and alcohol, are for states. And the Covid-19 pandemic has burnished that even more. States and centre are struggling for resources as the nationwide lockdown completes week 6 and economic activity has all but come to a halth.

Experts concur that states would like to hold on to these avenues for raising resources, and the Covid-19 pandemic has all but ensured that any possibility of even discussing the inclusion of these items into GST, by the GST Council, is now quite far-fetched.

After the GST came into being, late Finance Minister Arun Jaitley had repeatedly said that the centre was in favour of bringing petroleum products under GST. But states had held out.

He had also hinted that once the GST rates and collections stabilized, there could be wide-ranging discussions on including other items as well.

Liquor contributes a considerable amount to the exchequers of all states and union territories except the dry states of Gujarat and Bihar. Generally, states levy excise duty on manufacture and sale of liquor. Some states like Tamil Nadu also impose VAT (value added tax). States also charge special fees on imported foreign liquor, transport fee, and label & brand registration charges.

It is now clear that a number of states will follow Delhi and Karnataka’s example as they look for all available resources to fund the efforts against the Covid-19 pandemic. Not just from alcohol, but also from petroleum products.

Even though demand of petrol and diesel is low due to the lockdown, states have increased duties, and on Tuesday, the Centre followed suit.

“At a time when the states capacity to mobilize revenues is limited, it will be difficult to form a consensus to get oil under the purview of GST in the near future, if we think ahead in that direction,” said Soumya Kanti Ghosh, Chief Economic Advisor.

Ghosh said that roughly 60 per cent of oil revenues in India is accrued to the centre and 40 per cent to the states. “As per our projections for 2020-21, the combined revenue from petroleum could be around Rs 4.5 trillion. This includes the duties and charges that states put on petrol, diesel and other products. Last year it was Rs 6 trillion,” he said.

“Of the Rs 4.5 trillion, Rs 2.7 trillion will go to the centre and Rs 1.8 trillion will go to the states. That is nearly 1 per cent of GDP. That is a substantial sum of the states,” Ghosh said, and added that in some of the larger states like Maharashtra and Uttar
Pradesh, oil revenue as a percentage of total revenue is between 5-10 per cent.

With regards to alcohol, any discussion on including it in GST would normally have involved the possibility of amending the Constitution. Article 366(12A)2 of the Constitution Amendment Act on GST provides that “goods and services tax” means any tax on supply of goods or services or both except taxes on the supply of alcoholic liquor for human consumption.

What the pandemic has done is nix even any possibility on discussing bringing alcohol under the ambit of GST.

“Alcohol has constitutional embargo. I don’t think that will be a possibility in the next few years. And states would want to have that right,” said Pratik Jain, Partner and Indirect Tax Leader with PwC.

On petroleum products, there have been discussions to bring natural gas and aviation turbine fuel under the ambit of GST.

Petroleum Minister Dharmendra Pradhan has also been in support of such a move. Given that ATF has a very industry-specific use and natural gas in India is mostly used for power generation and in making fertilizer means that revenue upheavals will not be massive if they are brought under GST.

Jain said that since airlines are not in a great shape due to the pandemic, bringing in ATF under GST would actually help them since they would be able to avail input credit, and hence that steps needs to be expedited.

“Having GST on petrol and diesel, which are consumer fuels, require a larger consensus. As the GST is still stabilizing I don’t see it happening in the foreseeable future,” Jain said.

“As long as petrol and diesel are not under GST, states have the flexibility to increase duties based on the revenue situation.

From a classicial standpoint the two products should be under GST, but there are ground realities. Hence it is a long shot,” Jain said.