Petroleum GST can wait

Meeting existing implementation challenges more critical

On the face of it, the government’s intention to bring all petroleum products under the ambit of the goods and services tax (GST) is unexceptionable. The current GST regime for the petroleum sector is a half-way house. While kerosene, liquefied petroleum gas including domestic cooking gas, naphtha, and furnace oil are covered under the GST, several other products such as crude oil, aviation turbine fuel, petrol, diesel, and natural gas continue to remain outside the purview of the new indirect taxes regime. This imposes avoidable compliance cost on most oil companies by obliging them to maintain different accounting systems for different products. In addition, the exclusion of products from the GST denies all economic entities the benefit of input tax credit. Including all petroleum products under the GST would remove these shortcomings. Moreover, there will be significant efficiency gains by maintaining the GST value chain and reducing the cascading of taxes on intermediate products. Bringing these products under the GST poses no legislative hurdle — it just requires the GST Council’s nod.

However, there are challenges in implementing this idea. Petroleum products account for over 63 per cent of the central excise collections and about 29 per cent of the sales tax and value-added tax (VAT) collections by the states. A large portion of these tax collections comes from petrol and diesel. Hence, the GST Council will have to bear in mind the revenue implications of such a move, more so because of the high rates of central and state levies on petrol and diesel. For instance, the central excise on petrol is as high as 65 per cent and the states’ average VAT rate is 48 per cent. Similarly, diesel attracts a central levy amounting to 51 per cent, while the average state VAT is a little lower at 27.5 per cent. Reducing these rates to fit into the existing tax slabs under the GST could be a nightmare for the states and the Centre. They will be hard-pressed to shore up revenues at a time their fiscal consolidation efforts have already come under a huge pressure for a variety of reasons.

A way out of these difficulties, as reported in this newspaper, is to fix a GST rate of 28 per cent on petrol and diesel, but allow both the Centre and the states to levy a special excise duty or VAT rates on them, depending on their revenue considerations. It has been argued that this will allow taxpayers claim input tax credits to the tune of the GST rates on these products. It is also true that a few countries following the GST system have adopted a similar taxation flexibility for petroleum products. In spite of that, there is no doubt that the proposed GST regime for the petroleum sector will create more complications and confusion for trade and industry. The GST Council should seriously debate the desirability of introducing such a taxation regime for the petroleum sector at this stage when it is yet to resolve the many other glitches in the GST system. There is a far more pressing need for reducing the number of tax slabs and addressing several other implementation challenges. The idea of including the petroleum sector in the ambit of the GST can wait.