Speaking at the foundation stone laying ceremony of oil and gas projects in Tamil Nadu on February 17, Prime Minister Narendra Modi said that his government is working to bring gas under the ambit of Goods and Service Tax (GST). “We are trying to eliminate the cascading effect of different taxes. We are committed to bring natural gas under the GST regime,” PM Modi said, calling for global investors to invest in energy projects in the country. At a time when petrol and diesel prices are at an all-time high, and taxes have a bigger component in the retail price than the base price of the fuels, it is worth revisiting the debate on bringing petrol and diesel under the ambit of GST. There are both upsides and downsides to this idea. Here are three charts which explain the basic issues involved.
1. Bringing petrol-diesel under GST will lead to a sharp fall in current prices
Customers are paying more in taxes than the base price for petrol and diesel according to the latest price data for petrol and diesel. According to the information on the Indian Oil website, base price (in Delhi) of petrol and diesel was just ₹33.26 and ₹34.97 on March 1. The retail prices on the day were ₹91.17 and ₹81.47. The tax component in retail selling price of petrol and diesel was ₹53.94 and ₹43.74 per litre respectively. Central excise is a much bigger component of taxes than value added taxes levied by state governments. The highest slab under the existing GST rates is 28%. Even if petrol and diesel were to be taxed at the highest rate, the post-tax price will be much lower than what it is currently.
2. Bringing fuels under GST will make the revenue distribution equitable between Centre, states
As per the latest price-build of petrol and diesel (March 1) state taxes had a smaller contribution to the retail price than central taxes. While the state Value Added Tax (VAT) was ₹21.04 and ₹11.94 per litre on petrol and diesel, union excise duties for these two items were ₹32.9 and ₹31.8 per litre. These headline numbers suggest that the centre is a bigger beneficiary of tax incomes from the sale of petrol and diesel.
In an ideal world this would not have been the case. India’s constitution mandates sharing of all central taxes with state governments in keeping with the formula decided by the Finance Commission every five years. The 15th Finance Commission (FFC) has kept this share at 41% of central revenue. A simple application of this formula would mean that states would get ₹34.52 and ₹24.97 – all of VAT revenue and 41% of union excise duties per litre – in taxes for every litre of petrol and diesel sold at the current price build-up. This would be more than the ₹19.41 and ₹18.76 accruable to the centre; basically 59% of the total excise duty per litre.
But FFC’s earmarked share of states in centre’s revenues applies to what is called the divisible pool of taxes, which excludes cess and other forms of special taxes. Overtime, the weight of cess and other such non-sharable taxes has been increasing in the centre’s gross tax revenue.
This, in practice, has meant that the share of states in gross total revenue of the centre has never reached 41% and in fact gone down overtime. The 2021-22 Budget puts the estimated devolution of central taxes to states at just 30% of the centre’s gross tax revenue.
Union excise duties, most of which come from petrol and diesel in the post-GST phase, are a big source of these special cess collections for the centre. As per budget estimates for 2021-22, basic excise duties are only a fraction of special duties and cess levied on sale of petrol of diesel, proceeds of which will not be shared with the states. Because, GST proceeds are divided equitably between the centre and states, subsuming petrol and diesel under GST will end this inequitable tax distribution from sale of petrol and diesel.
3. But subsuming petrol-diesel under GST will also entail a loss or revenue and autonomy
To be sure, inclusion of petrol and diesel under GST is not a new demand. While opposition parties have been making this demand, the issue was discussed while the law was being framed. A ministry of finance document called The GST Saga: A Story of Extraordinary National Ambition includes this task as the first among “the potential areas of future work” under GST and notes that “Article 279 A(5) of the Constitution gives the (GST) Council the power to decide the date on which GST may be made applicable on Petroleum products”. As and when this is done, there will be two clear downsides on the fiscal front. One, GST will bring down tax earnings from sale of petrol and diesel significantly. Given the already strained fiscal situation, this will mean the government identifying additional sources of revenue to compensate for the loss on this count. Also, once petrol and diesel are subsumed within the GST, both the Centre and states will have to give away the current autonomy they enjoy with these taxes which serve twin purposes of counter-cyclical interventions in the realm of both politics and economy. For example, both the Centre and the states increased taxes on petrol and diesel to compensate for revenue loss during the lockdown. The central taxes on petrol and diesel are a fixed amount per litre rather than a fraction of the base price, which is how GST is levied currently. Also, the current regime allows individual state governments to change their taxes – poll bound Assam has reduced taxes on petrol-diesel – a leeway which will not exist once they are subsumed within GST, as taxes will have to be uniform across the country.
