Why it is best to leave petro-goods out of GST in the foreseeable future.
Faced with media and opposition pressure to bring down fuel prices by cutting petroleum taxes, Union Petroleum Minister Dharmendra Pradhan has been touting the need to bring petro-products under the goods and services tax (GST).
It ain’t happening. While throwing in the red herring of GST may be a good diversionary tactic, it won’t work. Both Centre and states have too much revenue at stake to allow this to happen; and if petro-goods revenues must be protected even under GST, we will have an even more complicated GST structure than we now have. So, it is best to throw talk of petro-goods under GST out of the window. Outraging over high pump prices may give talking points for out-of-work former finance ministers like P Chidambaram, but it is neither good politics not good economics (for reasons why one says this, read here).
Consider what kind of revenues are at stake. According to data provided by the ministry’s Petroleum Planning & Analysis Cell (PPAC), in 2016-17, petro-taxes generated Rs 273,222 crore for the Centre and Rs 189,587 crore for states. In the nine months to December 2017 in fiscal 2017-18, the corresponding figures were Rs 197,715 crore and Rs 150,916 crore for Centre and states.
Add the numbers and you get a phenomenal Rs 462,809 crore in taxes collected by governments in 2016-17. The 2017-18 figures are going to be similarly high despite two excises cut by the Centre last October and this February. There could be some more cuts later this year, if oil prices keep rising in the coming months.
There are four reasons why it is not possible to either cut taxes too much, or to bring petrol and diesel under GST anytime soon.
First, the entire fiscal arithmetic of the Centre, and many states, depends on oil sector taxes and revenues. Apart from Rs 462,809 crore collected as taxes, income tax, dividends and dividend taxes bring in another bonanza to the Centre – and to states, since they get 42 per cent share of central taxes under the 14th Finance Commission. Politicians can carp about high taxes when out of power, but keeping rates high is in the interest of both Centre and states. In 2016-17, taxes and other revenues from the oil sector added up to a whopping Rs 524,304 crore for Centre and states (including Rs 462,809 crore from indirect taxes).
Second, going back even partially to the old administered pricing regime in petrol and diesel will mean a regression from the most important achievement of the National Democratic Alliance government: deregulation. If subsidies must be increased in the run-up to the forthcoming state assembly and general elections over the next 12 months, the government may prefer to offer them on cooking gas and kerosene rather than petrol or diesel. Any subsidy also has the medium-term impact of reducing the profitability of oil companies, which impacts corporate dividend and other tax inflows. This impacts central finances first, and then state receipts of their share of central collections.
Third, after GST came into force, both states had Centre have lost some degree of revenue flexibility – more so in the case of states. Keeping petrol and diesel entirely out of GST thus gives both some measure of financial autonomy. So, even if it is a good idea in terms of administrative efficiency to bring petro-goods under GST, it is not a healthy development for fiscal federalism.
Fourth, if we assume that petro-goods should come under GST for some reason, and if we further assume that protecting revenues will mean keeping central, state and integrated GST at high levels, we are asking for a new complication in the already complex GST structure. Bringing petro-goods under GST will mean keeping the top rate high and call for a cess over and above it all to retain revenues. This will delay movement towards a simpler three-rate structure, with lower middle rates.
It is best to leave petro-goods out of GST in the foreseeable future.