Why the government must move fuel to GST

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By Chetan Bhagat

Fuel prices have hit all-time highs. Petrol crossed Rs 80 a litre. Diesel hit new records too. Fuel prices are technically supposed to be market driven, linked to international crude prices and foreign exchange rates. Practically, they are not. Both central and state governments tax fuel; the rates have varied wildly over the years. Rounding off for simplicity, the Centre taxes petrol at Rs 20 a litre. State taxes vary, but say for Delhi, they are around Rs 17 a litre. Hence, taxes amount to Rs 37 a litre. Without these, petrol at pumps would cost only Rs 43 per litre. This implies a whopping 84% tax on petrol, way higher than even the high-end slab of GST (28%), the supposed catch-all tax for goods and services in the country.

While tax on fuel has always been high, the last few years have been exceptional. Four years ago, central tax on petrol was around Rs 9 per litre (vs Rs 20 now), while state taxes were Rs 14 a litre (vs Rs 17 now). If we simply went back to those levels, the current petrol price would be just Rs 63 per litre.

So what happened in the past four years? Well, crude oil prices fell. As per policy, pump prices should have dropped, reaching Rs 40 a litre. However, the government interfered and raised taxes, cleverly ensuring that final petrol prices at pumps remained unchanged. As a result, you the consumer lost the benefit of lower crude prices. The consumers didn’t notice. Maybe they were just happy the prices didn’t rise. The government, meanwhile, had a windfall as fuel-related revenues doubled. Rough estimates suggest the Centre now makes around Rs 3 lakh crore from taxes on petrol products, and the states another Rs 2 lakh crore. To put it in perspective, the entire Union budget is around Rs 24 lakh crore, making fuel taxes a nice chunk of the government’s income.

Now, depending on whose side you are on, you may like or dislike this move. Some may say this was the only way the government could have fiscal discipline, which we never had in the past few decades. The extra money can be used to reduce our debt and increase welfare schemes. Detractors will say the fuel tax increase was a ploy to gouge more out of the middle class, which is fleeced at any given chance. Of course, all these discussions should have happened a few years ago when tax rates were changed, but somehow it didn’t attract much notice then. Until now, when the low crude oil price party has ended.

Crude prices shot up again. The rupee fell. Now, the taxes raised a few years ago seem like a huge burden on the consumer. The opposition took the issue head on, striking a chord with the middle class. Whether the BJP government will buckle or not remains to be seen. So far they haven’t. Maybe they think the angst people feel is temporary — either crude prices will fall again or people will just accept the hike and move on.

However, to think record fuel prices will have no political cost would be a mistake. Almost every political party takes the middle class for granted. Robin Hood style, they take from the middle class and pass it on as welfare schemes to the poor. By doing this, they hope to win more votes than the people they upset. However, fuel prices matter to all Indians now more than ever before. The jump in prices not only affects affluent voters with big vehicles, but also those with bikes. It also eventually causes inflation, which directly affects the poor. Taxation has its limits, and when an essential commodity like fuel is taxed at 84%, people do see it as unfair.

The ideal solution is to bring fuel under GST, anyway the right thing to do if you go by the spirit of GST as a universal indirect tax. If fuel moves to GST, petrol prices will be a mere Rs 55 a litre at current prices. Imagine the joy it would give to millions. Imagine the love GST would get, and the boost it would give to the economy.

Of course, a reduction in fuel taxes from 84% to 28% will mean a big hit to government revenue — of around Rs 2-3 lakh crore, or 10-15% of its spending. However, the government could, and should, have more creative ways to raise money — higher disinvestment, land sales, growing GDP faster and widening the tax net, for instance. Scaling back expenses and pulling out of schemes that don’t work can also help cover some of the shortfall. Finally, while deficit control is always important, sometimes it is important to let go. Loosen the purse strings when people are suffering too much.

The long-term solution, and something that could have prevented all this, is to consider fuel hedging, or locking in future purchase prices when crude prices are low.

Lowering fuel taxes is a chance for the government to give relief to the consumer, make the GST more comprehensive and take the arbitrariness out of taxation. While it won’t be easy to bridge the revenue gap, it’s about time we found more innovative ways to raise money than just taxing the middle class some more.

Views expressed here are personal

Source: Economic Times