The current situation, where oil prices are on an upward spiral due to external factors and the rupee is sliding, warrants that a call on inclusion of the five excluded products are taken sooner rather than later.
As fuel prices skyrocket and protests mount in the streets, a question oft asked relates to whether it is time that petroleum products are brought within the ambit of the goods and services tax (GST). The Constitution (One Hundred and First Amendment) Act, 2016 provided the framework for the levy of GST within the country. Five petroleum products namely petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel were kept outside the ambit of GST with the GST Council empowered to decide the date for bringing the aforesaid products within the GST fold.
As a result of the five petroleum products being kept out of the ambit of GST, the erstwhile tax regime continues to apply to these products with the central government levying excise duties and the state government imposing value added tax (VAT) on the sale of such products within their territory. It has been noted that where the central government levies a uniform excise duty of Rs 19.48 per litre for petrol and Rs 15.33 for diesel, VAT levied by the states could range from 6 per cent to 40 per cent. This is the reason that petrol and diesel are retailed at different prices across states and it has been typically noted that states, which are comparatively less developed, tend to have higher VAT rates on petrol and diesel.
One of the key reasons why petroleum products were left out of the GST ambit was due to the fact that it constituted a profitable revenue stream for both central and state governments. The extent to which the governments profited can be seen from the fact that effective tax rate for petrol and diesel was 100 and 66 per cent respectively.
The question now arises as to how the inclusion of petroleum products within the ambit of GST would lead to a reduction in the prices of the same. One of the attractions of the new indirect tax regime as envisaged by the GST lies in the fact that it allows for a streamlined flow of input tax credit. With the petroleum products staying outside the GST framework, there is a blockage of input tax credit for purchasers of the fuel as the excise duty and VAT paid on purchase cannot be set off against the GST payable on sale of concerned goods. Oil companies also face mounting costs as the GST paid on input goods and services cannot be set off. If the petroleum products currently outside the GST framework are brought within its ambit, the chain of credit would not be broken and thereby reduce costs to that extent.
Currently, there are four slabs of tax rates at 5, 12, 18 and 28 per cent respectively. If petrol and diesel are brought within the highest tax bracket of 28 per cent, prices at the retail level could drop by as much as 34.29 per cent for petrol and 22.23 per cent for diesel. However, the likelihood of the above occurring is extremely low as the ramifications for government revenue would be immense.
Currently, it has been estimated that the central government mopped up revenue of Rs 1.60 lakh crore in excise duty from petroleum products during FY 2017-18 while states earned Rs 1.66 lakh crore from VAT on the same products. Studies have documented that states’ fiscal deficits, especially of those relatively less developed states like Rajasthan, would balloon once petroleum products are brought within the GST, even if the highest bracket of 28 per cent is applied.
Essentially, the political class has a tough call to make as they seek to balance their fiscal considerations with the imperative of providing some solace to consumers suffering runaway fuel prices. Calls have been rising for the central government to cut the excise duty levied on petrol and diesel in order to provide some short term relief.
In light of such demands, it has been felt that inclusion of the petroleum products within GST would be more effective. Union Minister for Petroleum and Natural Gas Dharmendra Pradhan, former chief economic adviser Arvind Subramanian ,the Maharashtra government and State Oil Companies among others have all batted for the inclusion of petroleum products within the GST at one point or the other. It was expected that these products would be brought within the tax net once revenue collections under the new regime had stabilised.
However, the current situation, where oil prices are on an upward spiral due to external factors and the rupee is sliding, warrants that a call on inclusion of the five excluded products are taken sooner rather than later.