Auto fuels under GST: Why there’s a case for it, and one for caution, too

Petroleum Minister Dharmendra Pradhan has said government is considering bringing petrol, diesel under GST to check prices

Written by Shaji Vikraman | Mumbai | Published: May 30, 2018 12:43:07 am
Auto fuels under GST: Why there’s a case for it, and one for caution, too Petroleum Minister Dharmendra Pradhan has said government is considering bringing petrol, diesel under GST to check prices

With the prices of automobile fuels surging, Minister for Petroleum and Natural Gas Dharmendra Pradhan said in Bhubaneswar Monday that bringing petroleum products under the ambit of the Goods and Service Tax (GST) was being considered by the government as part of a “holistic strategy” to address the issue. Transport Minister Nitin Gadkari, too, favours such a move — and Maharashtra Chief Minister Devendra Fadnavis has said that his state was fine with petroleum products being brought under a single rate countrywide, and that a Task Force was working on it. Chief Economic Advisor Arvind Subramanian had earlier this year made out a case for bringing petroleum products under GST.

The trigger for all this is rising oil prices — the benchmark Brent crude crossed the $80 per barrel mark earlier this month — and the daily revision of prices of petrol and diesel.

How will this help?

When India moved to the GST regime last July, petroleum products were excluded, along with alcohol, real estate and power. In the current structure, both the central and state governments levy a tax on petrol, diesel, crude, and natural gas. The Centre charges excise duty, while each state has its own Value Added Tax (VAT). Added to these are the dealer commissions, all of which inflates the price that consumers pay at the retail pumps. (On Tuesday, petrol was Rs 86.24 per litre in Mumbai, Rs 81.43 in Chennai, Rs 81.06 in Kolkata, and Rs 78.43 in Delhi.)

Bringing petroleum products under GST would mean a single rate — 18% or 28% — in place of excise duty and state VAT, and lower pump prices. It will take the political heat off the government, and is likely to lead to lower transport costs for industry, with benefits in terms of boosting production and competitiveness. It will also be in keeping with the idea of a ‘single nation, single tax’, which is aimed at improving production and employment while taxing consumption.

Because these products are excluded from GST, many firms are at a disadvantage: they cannot set off inputs costs like transport, logistics, services, spares, or claim input tax credit. They miss out on productivity gains as well.

But there’s a flip side

For both the federal and state governments, petroleum products, like alcohol, are huge revenue earners. The Centre mopped up Rs 1.60 lakh crore in excise duty from petroleum products in FY18, and Rs 2.42 lakh crore in FY17, even as global oil prices fell from 2014-15 through 2016-17. Between 2013-14 and 2016-17, the central government collected Rs 2,79,005 crore in excise duties alone — a windfall that helped it show a better fiscal position. Similarly, states earned Rs 1.66 lakh crore in VAT on these products in FY18; Maharashtra, for example, currently makes close to Rs 22,000 crore.

Revenue considerations, therefore, are likely to drive the decision on bringing petroleum products under GST. The decision will have to be taken by the GST Council, in which states have a major say.

Even if they agree to having petrol, diesel and other products under GST, they will still have the autonomy to levy an additional or top-up tax, which can vary across states. This surcharge can be in the nature of a “sin tax” — a way for states to discourage consumption of certain products like liquor or tobacco — and to reduce vehicular pollution.

Even the Centre will have reasons to worry — not only because of the huge revenue petroleum products bring, but also because it is committed to compensating states for any shortfall in revenues for five years.

There are other considerations, too. The decision will have to take into account larger questions such as those of equity, given the consumer profile of those buying fuel for personal vehicles, and the issue of an efficient public transport system.

shaji.vikraman@expressindia.com

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