On November 3, 2021, the central government announced a Rs 5 per litre cut in excise duty on petrol and a Rs 10 per litre cut in excise duty on diesel. (The last time the government cut excise duties was in October 2018 when crude oil prices peaked at US$ 84 per barrel, causing the price of petrol to rise to Rs 84 per litre and the price of diesel to Rs 75.5 per litre in Delhi.) Following the Centre’s move, some state governments also cut the VAT on petrol and diesel. Even if the states did not act, the actual amount of value added tax (VAT) levied by them on fuels would be likely to reduce because they levy varying tax rates on an ad-valorem basis, i.e., as a percentage of the fuel price after central excise duties are levied. The move eased fuel prices to an extent, with the price of petrol falling below Rs 100 in most parts of the country, but the debate over the price of fuel and the overall pricing structure continues to rage.
One of the questions that occupies the public mind is why petroleum products are not brought under the goods and services tax (GST) regime.
Goods and Services Tax (GST)
The Constitution (101st Amendment) Act, 2016 introduced a nationwide GST in the country with effect from July 01, 2017. It is a destination-based consumption tax, i.e., it would accrue to the state or the union territory where the consumption takes place. There would be a dual GST with the Centre and the states simultaneously levying tax on a common tax base. The GST to be levied by the Centre on inter-state supply of goods and services would be called the central GST (CGST) and that to be levied by the states including union territories with legislature/union territories without legislature would be called the state GST (SGST) or union territory tax (UTGST) as the case may be. There are different rates of GST, as of now four—5 per cent, 12 per cent, 18 per cent, and 28 per cent. Besides, some goods, such as cereals, fresh vegetables and fruits, human blood and its components, organic manure, and so on, come under zero GST. There are some products that are not taxable under the GST Act; in this category are alcoholic liquor for human consumption and five petroleum products, viz., petroleum crude, motor spirit (petrol), high speed diesel, natural gas, and aviation turbine fuel (ATF). The status quo was maintained on taxes on the five petroleum products (petrol, diesel, ATF, natural gas, and crude oil) besides alcoholic products for human consumption. While these petroleum products were constitutionally included under the ambit of the new indirect tax regime, it was left for the GST Council to take a call as to when the GST shall be levied on them. The tax slabs may be reduced, or the goods charged differently in the future, if the GST Council decides so.
The GST Council was established in order to implement the GST. The GST Council is a constitutional body established under the 101st Amendment Act to decide issues relating to the GST. As per Article 279A of the Constitution, the GST Council was to be a joint forum of the Centre and the states with the union finance minister as its chairperson and the ministers in-charge of finance or taxation or any other minister nominated by each state government as its members. The union minister of state in-charge of revenue or finance was also a member of the council. The mechanism of the GST Council was to ensure harmonisation of different aspects of GST between the Centre and the states as well as among the states. The GST Council meets and votes on an issue. The decision is made on the basis of a majority of not less than three-fourths of the ‘weighted votes of the members present and voting’, wherein the central government would have the weightage of one-third of the total votes cast and the state governments would have a weightage of two-thirds of the total votes cast.
Call for the Inclusion of Petroleum Products under GST
The price of a litre of refined petrol is nearly four times the price of the same amount of crude oil. This is not entirely because of factoring in the cost of transportation and refining crude oil into the total price, but because of the huge tax imposed by the governments at the union as well as the state level. This tax actually is meant to be a safeguard against the fluctuating prices of petrol in the international markets.
As the prices of petrol and diesel continue to rise, the question often arises as to why petroleum products have not been included under the GST regime. Once included under the GST regime, the prices of petroleum products would certainly be reduced and stabilised. In this regard, while considering a writ petition filed in June 2021 in the Kerala High Court, the court asked the GST Council to decide on bringing petrol and diesel under the GST. Accordingly, the matter was taken up for discussion in the 45th meeting of the GST Council in Lucknow on September 17, 2021. The council decided that it was not the right time to bring petroleum products under the ambit of the GST.
Current Mechanism of Oil Pricing
Most goods and services are subject to taxes by the Centre, the state governments, or both. In the case of petrol and diesel, the high rates of taxation and the sheer scale of tax revenue involved plays a decisive role. As an editorial in the Economic and Political Weekly points out, oil is closely associated with high taxes the world over. For the G7 countries, taxes make up 50 per cent of the retail prices. In the United Kingdom and Italy, taxes are 60 per cent of the retail prices. In India, petrol and diesel taxes are around two-thirds of the retail prices.
Currently, petrol and diesel are subject to excise duty and cess by the central government and VAT by state governments. Excise duty levied by the central government on petrol and diesel includes basic excise duty of Rs 1.40, special additional excise duty of Rs 11, and the cess on each litre. The cess on petrol and diesel has two components: one, road and infrastructure development cess of Rs 18 per litre on both petrol and diesel and, two, agriculture infrastructure and development cess of Rs 2.5 per litre of petrol and Rs 4 per litre of diesel. Taxes account for at least around 50 per cent of the retail prices of petrol and diesel. It is to be noted that VAT (levied by the state governments) varies widely across states; it is highest in Maharashtra (28 per cent) followed by Telangana (25 per cent). As a result, retail prices of petrol and diesel vary widely across states in the county.
The oil sector has been an easy pick for the government to shore up its revenues since demand for oil is price inelastic (a rise in price of oil will result in less than proportionate decrease in demand for oil because oil is a necessity for transport and industries). As per data from the Petroleum Planning and the Analysis Cell, for 2019–20, total central and states taxes on the oil sector contributed a huge Rs 5.55 lakh crore, which was around 17 per cent of the total taxes collected in the country and about 3 per cent of the gross domestic product (GDP) in 2019–20. The total contribution of the petroleum sector to the Centre’s coffers (in the form of excise duty/cess) has risen from Rs 1.72 lakh crore in 2014–15 to Rs 3.34 lakh crore in 2019–20, while for state governments (through VAT), it has risen from Rs 1.6 lakh crore in 2014–15 to Rs 2.21 lakh crore in 2019–20.
The five petroleum commodities were kept out of the purview of GST for the time being, mainly because of the revenue dependence of the central and state governments on this sector. In the circumstances, the central government continued to levy excise duty/cess on them while state governments charged VAT. These taxes, with excise duty in particular, have been increased periodically.
Moreover, with a decrease in global oil prices, the benefits in the forms of lower retail prices have not been passed on to the end consumers as governments maintained or increased their taxes to shore up finances; a spike in global oil prices, on the other hand, pushes petrol and diesel to higher levels of prices. In recent times, price of petroleum products reached an all-time high, following the rise in global crude oil prices because of recovered demand, efforts by OPEC+ nations, and receding restrictions on trade and movement all over the globe. Consequently, there was a steep rise in prices domestically, leading to vociferous demand for petrol and diesel to be brought under the GST regime.
Benefits of Including Petroleum Products under GST
Indirect taxes are regressive in nature as they impact people equally irrespective of their income or wealth (a tax on a certain good will result in a poor as well as a non-poor paying the same amount of tax, if both purchase that good). Indirect taxes on fuel are all the more so because a hike in the prices of petrol or diesel price triggers a vicious cycle of price hike in the economy. This affects the poor masses disproportionately.
Bringing petroleum products, especially petrol and diesel, which are heavily taxed by the central and state governments, under GST would result in a major decrease in their retail prices, even if the 28 per cent peak rate (the highest rate of GST) is levied. In addition to the reduction in retail prices of petrol and diesel, their inclusion under the GST regime would also put an end to the cascading effect of the current system of taxing fuel: under the existing mechanism to tax fuels, states levy VAT not just on the cost of production but also on the excise duty charged by the union government on such output.
The prevailing mechanism of taxing petroleum products creates inefficiencies. Inputs used in exploration of oil and natural gas are subject to taxation under the GST framework. Accordingly, explorers such as Oil and Natural Gas Corporation (ONGC) have to pay GST on inputs they use in their operations. However, their output, i.e., crude oil and natural gas are not covered under GST. As a result, oil explorers are subjected to two separate streams of indirect taxation making cross-utilisation of input tax credits impossible. Inclusion of petroleum products under GST would make their businesses more tax efficient.
For crude oil refiners like Indian Oil Corporation Limited (IOCL) and Reliance Industries Ltd, their input (crude oil) is out of the purview of GST whereas others inputs that go into refining operations attract the GST. Moreover, while some of their finished products such as petrol, diesel, and ATF attract central excise duty and state-level VAT, other products such as naphtha, light diesel oil, waxes, bitumen, and other refinery by-products attract GST. This complexity in taxation of petroleum products results in ambiguity and inefficiency. Including all petroleum products under the GST regime would simplify tax administration and result in tax efficiency. Simplification of tax administration and removal of tax inefficiencies would benefit consumers and improve the competitiveness of businesses.
Why the Refusal to Include Petroleum Products under GST
In the petition filed in the Kerala High Court, the petitioner sought the unification of taxes levied on petrol and diesel separately by the union government and the state governments. It was pointed out that frequent increases in price adversely affect the life of citizens as prices of common goods also increase with the increase in fuel prices. Higher fuel prices tend to create inflationary pressure in the economy. A uniform GST on petroleum products will drastically reduce central and state levies on petrol and diesel and bring down retail prices substantially.
Despite the merits of including petroleum products under the GST regime, the idea has faced resistance from the participants due to a number of reasons. These include the following:
Revenue shortfall for the Centre as well as the states The revenue shortfall due to transition of petroleum products to GST is a big worry for the union government as well as the state governments. It is worth mentioning that both the union government and the state governments generate considerable amount of revenue from taxing petroleum products. Moreover, each state exercises independence in taxing petroleum products. States determine the tax on petroleum products after taking into consideration the prevailing crude oil price, transportation change, dealer commission, and excise duty imposed by the central government. Bringing petroleum products under the purview of GST, even within the highest slab of 28 per cent, would significantly dent the tax revenues of the governments. The union government would witness a revenue shortfall because most of the excise duty on petrol and diesel is made up of the cess, which it does not share with the states. States would also face a major dent in their revenues from taxes on petroleum products compared to what they currently earn from petrol and diesel sales as VAT. Under the GST framework, all tax revenues from petroleum products will be split 50:50 between the Centre and the states.
Specific reasons for opposition by state governments The state governments have their own reasons for opposing the idea of bringing petroleum products under GST, as discussed below:
Revenue anomaly between producing and consuming states GST being a destination-based consumption tax, bringing petroleum products under its purview would mean that states where these products are sold (destination states) get the tax revenue and not the states where they are produced/refined (origin states). That would mean states such as Uttar Pradesh and Bihar with their huge population and a resultant high consumption would be getting more tax revenues at the cost of producer states such as Gujarat or Maharashtra. States where the production/refining takes place are apprehensive of losing their independent power to tax petroleum products, and thus they resist the idea of inclusion of petroleum products under GST.
Revenue differences due to present rates As already mentioned, states independently fix their VAT on the sale of petroleum products. Now, the rate of VAT on petrol and diesel varies widely across states and union territories. For instance, Madhya Pradesh charges up to 40 per cent on petrol, while Andaman and Nicobar Islands charges just 6 per cent; with the inclusion of petrol and diesel under GST, the prices of these products will increase dramatically in the latter while they would fall in the former, if the cumulative rate is lower than the current rate. As a result, the common person would end up paying more for petrol in Andaman and Nicobar Islands. The Madhya Pradesh government, on the other hand, would lose out on tax revenue as the GST would lower the effective rate of tax on petrol.
So, even in the likelihood of the union government being open to the possibility of including petroleum products under GST, the move will generate stiff opposition from several state governments unless their revenue concerns are satisfactorily dealt with.
The need is to build consensus on the issue and take respective state governments into confidence.
Way Forward
Bringing petrol and diesel under the ambit of GST may take longer than expected, given the fact that this was the first time the issue came up before the GST Council for discussion. States have to be taken into confidence before any move can be made in this direction. The most prominent concern of the state governments is that of revenue shortfall in case petroleum products come under the GST regime. The union government will need to come up with a compensation formula, just like the one in the case of implementation of GST in the country.
Considering the revenue concerns of the states, it may not be possible for the GST Council to immediately bring all petroleum products under GST at one go. A beginning in this direction can be made by including, say ATF, under GST. The price of ATF is a major component of the operating costs of airlines. If states can begin by lessening their VAT on ATF, it will make airfares cheaper. Kerala and Telangana have reduced VAT on ATF from as high as 25 per cent and 16 per cent, respectively, to 1 per cent. Other states, such as Andhra Pradesh, Chhattisgarh, and Nagaland have followed suit. The civil aviation ministry has requested 22 states and union territories to reduce the existing VAT/sales tax on ATF to 1–4 per cent at all airports. Gradually, ATF can be brought under GST. Similarly, natural gas can be integrated under GST. Other petroleum products can be taken up later. Including under the GST regime items that may not disrupt governments’ revenue stream, such as ATF and natural gas, could be a good beginning.
The issue of bringing petroleum products under the GST regime pertains not just to the filling up of the coffers of the governments but to the pockets of the common person as well.
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