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 37 states 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 Rs 19.48 on one litre of petrol and Rs 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 data from the Ministry of Petroleum and Natural gas prior to the recent cuts in VAT rates by Gujarat, Himachal Pradesh, Uttarakhand and Maharashtra.

After the October 4 excise duty cut, petrol costs Rs 68.50 a litre in Delhi on Wednesday, of which the tax component is Rs 34, or half of the consumer price. Of this, Rs 19.48 goes to the Centre through various excise duties, and Rs 14.5 to the state, in the case of Delhi, in the form of VAT. On the retail selling price of diesel at Rs 57, the Centre earns Rs 15.30, while the state earns Rs 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, at 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 Rs per litre) would come down by 49 per cent for petrol and by 37 per cent for diesel, according to the author’s estimates. Approximating it to 40 per cent, the revenue to the Centre from sale of petrol and diesel will decline from the budgeted Rs 3.4 lakh crore to Rs 2 lakh crore. This would bring down the retail price to nearly Rs 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 the cushion the consumer or increase revenue for the government will be more difficult under the GST.

Though the petroleum sector is in the GST regime that kicked in from July 1, 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 central government from the sale of petrol and diesel was estimated at Rs 3.4 lakh crore in 2017-18 and after a Rs 2 excise duty reduction on October 4, it is expected to fall short by Rs 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 roadmap 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 moment.” 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 Rs 3.3 lakh crore in the form of various excise duties from the sale of petrol and diesel in 2016-17 (revised estimate), a 150 per cent rise in three years from Rs 1.3 lakh crore in 2013-14 as a result of the increase in excise duty during the low petroleum price phase. Despite the October 4 excise duty cut, petrol costs Rs 68.50 a litre in Delhi, of which the tax component is Rs 34, or half the consumer price. Of this, Rs 19.48 goes to the Centre through various excise duties and Rs 14.50 to Delhi in the form of the VAT. On the retail selling price of diesel of Rs 57, the Centre earns Rs 15.30, while Delhi earns Rs 8.40.