Petrol, Diesel Under GST? Here’s What’s At Stake

Facing criticism after auto fuel prices in India hit a three-year high last month, Oil Minister Dharmendra Pradhan pitched the idea of including petrol and diesel under the Goods and Services Tax.

Transport fuels are outside the nationwide levy. The central government levies a uniform excise duty while the value-added tax varies across states. Which means, prices vary between states. Moreover, the taxes are levied ad valorem—based on the value of the product.

Bringing fuel within the ambit of GST would ensure a uniformity in prices of petrol and diesel, Pradhan had said, after refusing to step in to check prices.

Also Read: Crude Fell By Half, But Your Fuel Bill Didn’t. Here’s Why.

Petroleum products, along with alcohol, were kept out of the GST as states wanted control over the source of revenue. Together, the states and the centre earned about Rs 2.7 lakh crore from taxes on fuels in the year to March, according to data by Indiastat.com and a budget document. The states cornered over 60 percent of it. Fuels contributed about 7.3 percent of their total revenue in the last financial year, according to a Reserve Bank of India report on state finances.

That leads to the question how the centre and states will share the revenue if petroleum is brought under GST.

Here’s how things stand now: The highest rate under GST is 28 percent, with the states and the centre equally sharing the taxes. Demerit goods like cigarettes and cars attract a cess.

In comparison, total taxes, including excise and VAT, on petrol in New Delhi worked out to over 53 percent in September, according to BloombergQuint’s calculations based on data from Petroleum Planning and Analysis Cell website and Indian Oil Corporation Ltd. The effective tax rate will be higher in states like Maharashtra where VAT is more. The government has since reduced excise by Rs 2 a litre, but crude oil prices have gone up as well.

Since states earn a higher share of fuel taxes, an equal division would mean that they will have to be compensated for the revenue loss.

GST also has a provision to increase the tax rate to 40 percent, said Pratik Jain, leader-indirect tax at PwC. And it’s not mandatory to equally divide the revenue between the central and state governments, he said. To maintain revenue neutrality, one way could be to levy GST over and above an excise duty at a reduced rate, he said.

If the total levy on petroleum products in the existing structure does not fit into any GST slab, the government may have to introduce a new rate like in case of gold, said Abhishek Jain, indirect tax partner at EY India.

Including petrol and diesel in GST will also allow companies consuming fuel—say airlines—to claim input tax credit. The new tax regime grants manufacturers and suppliers credits on taxes paid that can be set off against a future liability.

NR Bhanumurthy, a professor at National Institute of Public Finance and Policy, advised caution. “The government should wait and analyse the trend of GST collections before deciding on any such change.”

The GST Council can consider a staggered approach, starting by including products like natural gas and jet fuel, Jain of PwC said.