Even if petrol comes under GST, it may not exclude VAT

The clamour for bringing petrol and diesel under GST has been growing in recent times, be it from the Opposition or from India’s top industry bodies Assocham and Ficci. After all, even under the highest tax bracket of 28 per cent, one litre of petrol would cost only Rs 50.87, compared to the current price ranging from Rs 76 to Rs 84 per litre in the metros.

However, if the government does indeed decide to take the bull by the horns and bring the automobile fuels under the GST regime, that’s not how the math will work out. Because, according to a top government official, the tax structure for the two fuels is likely to be a peak tax rate of 28 per cent plus states levying some amount of local sales tax or value added tax (VAT).

Unfortunately, this structure of peak GST rate plus VAT would work out to be as expensive on the common man’s wallet as the present tax incidence. Currently, the central government levies an excise duty on the fuels, which stands at Rs 19.48 per litre for petrol and Rs 15.33 per litre on diesel. In addition to this, the states impose VAT at different rates to boost their revenues. In Andaman and Nicobar Islands, a mere 6 per cent sales tax is charged on both the fuels, but Mumbai has the highest VAT of 39.12 per cent on petrol while Telangana levies highest VAT of 26 per cent on diesel. The total tax incidence on p

etrol comes to 45-50 per cent, while on diesel it is 35-40 per cent.

“There is no pure GST on petrol and diesel anywhere in the world and so in India too it will have to be a combination of GST and VAT,” said the official, who is closely involved with the GST implementation. According to him, the timing of including petro products in GST will be a political call which centre and states have to take collectively. But before that, the Centre has to decide if it is willing to forego the input tax credit of about Rs 20,000 crore that it currently pockets by keeping petrol, diesel, natural gas, jet fuel and crude oil out of the GST regime that came into force from July 1, 2017.

The source explained that under GST the total incidence of taxation on a particular good or a service has been kept at the same level as the sum total of central and state levies existing before the new regime rolled out. This was done by fitting them into one of the four GST tax slabs, namely 5 per cent, 12 per cent, 18 per cent and 28 per cent.

In the case of petrol and diesel, the total incidence of present taxation is already beyond the peak rate. So even the highest GST tax rate would result in a significant revenue loss, by the centre and the states alike. “The Centre doesn’t have the money to compensate states for loss of revenue and so the solution is to have a peak rate of tax plus allowing states to levy some amount of VAT keeping in mind that the overall incidence should not exceed the present levels,” he said.

The bottomline is that GST may not be the panacea for high fuel prices that everyone expects, at least not in the format in the works. More importantly, GST being an ad valorem levy – charged as a percentage on ex-factory price – would have a cascading impact on retail prices whenever refinery gate prices jump up following a rise benchmark international oil prices. The inverse would also be true.

In a blog post on Monday, Union Minister Arun Jaitley had alluded to states earning more through ad valorem VAT when oil prices rise. “The States charge ad valorem taxes on oil. If oil prices go up, States earn more,” he said. The central excise is a fixed levy and does not change with changes in prices. The Modi government had raised excise duty on petrol by Rs 11.77 a litre and that on diesel by 13.47 a litre in nine instalments between November 2014 and January 2016 to shore up finances as global oil prices fell. On the other hand, it cut the tax just once – by Rs 2 a litre last October.

In the bargain, the government’s excise collections from petro goods more than doubled in last four years, from Rs 99,184 crore in 2014-15 to Rs 229,019 crore in the last fiscal. States, likewise, saw their VAT revenue from petro goods rise from Rs 137,157 crore in 2014-15 to Rs 184,091 crore in 2017-18.

No wonder the government has been so reluctant to let go of this cash cow.