Bringing petroleum products under GST regime would spell relief for consumers even if kept in highest bracket

All eyes are on the possible outcome of a crucial meeting of a ministerial panel of the GST council meeting on Friday, which is scheduled to consider bringing petroleum products under the GST regime. If there is agreement to do so, it would bring great relief for the people even if the rate is pegged at the highest bracket of 28 percent. They have been paying through the nose for petrol, diesel and LNG because the government has been using fuel tax as a cash cow.

Fuel prices have been hopping from one high to another consistently over the past several months, until the relentless rise showed some respite in recent weeks, thanks to certain new developments in the global market as also the approaching round of assembly elections, which present its own compulsions to keep prices under check for fear of popular discontent.

The rising fuel prices even caused concern to the Reserve Bank of India, which cautioned against its adverse impact on household incomes, already under strain due to a sequence of events beginning with the lockdown. In fact, the RBI recently called for ‘urgent’ cuts in fuel prices, and cited inflationary pressures as a matter of serious concern, prompting it to suggest a reduction in taxes to keep prices under check.

A decision by the Kerala High Court on a petition filed by a local organisation was the immediate trigger for a possible change. The petition, filed by Kerala Pradesh Gandhi Darshanvedi, complained about huge differences in the prices levied in different states and urged for uniform rates. The court asked the Centre to take a decision within six weeks.

The government’s high revenue dependency on fuel is acting as a deterrent to a reduction in prices. In fact, when GST was introduced in 2017, amalgamating over a dozen central and state levies, the petroleum products were deliberately kept out due to the high revenue dependence of the Central and state governments on this sector. This meant that the central government continued to levy excise duty on them while state governments charged value-added tax (VAT). And the governments have been periodically raising these taxes, particularly excise duty, to rake in more and more money

According to reports, the Centre is estimated to earn Rs 1.87 lakh crore in 2021 financial year from the Rs 13-16 per litre additional cess and surcharges imposed on fuels in March 2020 and later in the month of May of the same year. On a projection of 8 percent rise in fuel demand in the next financial year, the incremental income from the hikes has been worked out at over Rs 2 lakh crore.

Another major hurdle in bringing petroleum products within the GST regime is the complication introduced by the nature of GST as a consumption-based tax, which means that the revenues would accrue to states where the fuel is consumed rather than where it is produced, as is the present case. This would mean that highly populous states like Uttar Pradesh and Bihar stand to gain as the consumption levels in their states will be higher, but states such as Gujarat, where petroleum products originate from in a significant way, stand to lose revenue. That Gujarat is under BJP rule introduces another level of complication.

As for the Central government, the Rs 32.80 per litre excise duty on petrol and Rs 31.80 on diesel, made up of various cesses, is entirely for itself to keep, as this is not shared with the state governments. Under GST, all revenues will be split 50:50 between the Centre and the states.

Former petroleum minister Dharmendra Pradhan had consistently advocated for petroleum products to be included in the GST, but this was more in the nature of an academic exercise rather than concrete action.

If the council decides to effect the change, it will be a landmark move that will have far reaching implications for government finances while providing a big boost to household incomes.

(IPA Service)

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