GST on crude oil, petrol and diesel boils down to revenue concerns

Despite Constitutional provisions, inclusion of petrol and diesel under GST framework remains a distant dream

Retail prices of petrol in three metros — Mumbai, Kolkata, and Chennai — are ruling above Rs 100 a litre and in Delhi over Rs 90 for at least three years now.
 

Similar is the case with diesel, which is above Rs 90 in Mumbai, Kolkata, and Chennai, and more than Rs 85 in Delhi.
 

This could be lowered to some extent if these fuels are brought under goods and services tax (GST), an idea the Centre is in favour of.
 

However, the recently held GST Council meeting took the decision to streamline rates on certain products such as milk cans, carton boxes, sprinklers, solar cookers and services provided by the Indian Railways but it did not touch petrol and diesel in the seven-year-old indirect tax. The list of items for discussion included natural gas and aviation turbine fuel (ATF).

At present, GST is not imposed on crude oil, petrol, diesel, ATF, and natural gas.
 

This was despite the fact that including petroleum in GST will not require a Constitutional amendment if the Council, comprising the Union and state finance ministers, agrees. This is so because GST on petroleum is already there in the Constitution Amendment Act on GST.

According to the 101st Constitution Amendment Act, it is up to the GST Council to decide the date on which such a move is to be taken.

Bringing petroleum products, particularly petrol and diesel, under GST would do away with the cascading impact of taxes and enable players to claim input tax credit (ITC), giving relief to companies and customers.

At present, the Centre imposes excise duty, Customs duty, and various kinds of cess on petroleum products. The major revenue comes from excise duty. Some states impose sales tax, while the majority impose value-added tax (VAT).

The issue arises as to why there is cascading of taxes, which in layman’s terms means tax on tax, when VAT is imposed by the majority of the states. 

This is so because VAT is not imposed on the base or ex-factory price of these products but after the duties imposed by the Centre.

This means while input tax credit is available on the VAT side, this can’t be claimed for excise duty, said M S Mani, partner at Deloitte India. In other words, ITC is not available for the entire chain of the tax system, he said.

If such are the benefits of GST on petroleum, why has the Council not been taking up this issue, barring in a meeting in Lucknow in 2021? The Lucknow meeting had discussed this issue after the Kerala High Court directed it to do so. That meeting had rejected the idea of imposing GST on petroleum products.

It is not difficult to understand the reasons behind the states’ resistance to bringing petroleum under GST. Their revenues from sales tax/VAT from petroleum constituted 16-17 per cent of their own tax revenues for the last five years till 2022-23.

For the Centre too they are the source of important tax revenues, accounting for at least 9.15 per cent before devolution to the states during the last six years till 2023-24. This share has drastically reduced from the peak of 19.3 per cent in 2020-21 due to cut in cess and excise duties.
 

Besides, the Centre and the states have the flexibility to raise or reduce taxes on these products, which will not be the case if these products are brought under GST. The flexibility to the states is evident from the fact that there is wide variation between state-level VAT rates on petroleum, while those are expected to be uniform. Telangana has imposed 35.2 per cent VAT on petroleum and 27 per cent on diesel, while in the case of Meghalaya it is 13.5 per cent or Rs 13.5 per litre (whichever is higher) and 10 paise/litre pollution surcharge on petrol, and 5 per cent or Rs 9 per litre (whichever is higher) and 10 paise/litre pollution surcharge on diesel. The Union Territory of Lakshadweep has just 1 per cent VAT on petrol and diesel each. 
 

On the other hand, the Centre has ad valorem customs duty of 2.5 per cent on petrol and diesel and a flat rate of additional Customs duties on them. Excise duty and cess amounted to a flat rate of around Rs 20 per litre on unbranded petrol and a bit more on branded one. This stands at around Rs 16 a litre on unbranded diesel and a bit more on branded ones.
 

Contrary to the popular notion, the Centre does not get much increased revenues when international crude oil prices harden since the majority of its tax rates are lump sum or flat.  

Sandeep Sehgal, partner at tax and consulting firm AKM Global, said adding petrol and diesel to GST was a challenging task due to their significant role as revenue generators for both the central and state governments.

“Even the highest GST slab of 28 per cent would not match the amount of taxes currently levied on these products,” he said. As cited above, Telangana alone imposes a much higher rate than 28 per cent on petrol, leave aside the Centre’s.

ICRA Chief Economist Aditi Nayar said: “The states may remain averse to including petrol and diesel in GST because they would like to retain some flexibility in changing tax rates when the state’s unique fiscal or economic position warrants it.”