No need to include petroleum in GST | Business Standard Column

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At present, petroleum is an item, along with alcohol, which gives satisfaction to states that they have some fiscal federalism left with them

I find that it is no longer easy to get a subject to write about GST and its basic structure. The previous taxes, namely central excise, service tax, and sales tax, had so many problems such that there was no dearth of subjects for writing articles by me and other analysts. Now after GST, I find that there is no subject, except the number of rates, evasion, and input credit delays. That proves by implication that GST has solved many problems, such as defining manufacture, finding out the correct taxable event, determining what was intermediate goods, and all.

Not getting any subject, some analysts have recently taken to writing about including petroleum into GST. I am writing to say it is a non-issue and there is no hurry to include this into GST. Nor is it all that necessary.

At the time of the introduction of GST, petrol and diesel were not included and they remained under the existing system of central excise by the Centre and sales tax by states so that input credit of previous tax paid was not admissible. That made the tax higher, though, of course, it depends on the rate of tax levied.

If petroleum is included in GST, there will be a single rate; many people speculate that it will be 12 or 18 per cent. That will not most certainly be the rate. It is likely be 28 per cent because it has to generate revenue. After input credit, the effective rate will be even less than 12 per cent because the value addition if not high at all. Revenue buoyancy is the prime consideration when revenue from GST is falling so short that even the compensation for the shortfall is difficult to pay. Some analysts have expressed their observation that petroleum and its products are regarded by the government as sin goods and so the rate of tax is necessarily to be higher. This is a misnomer as the government has at no stage called it a sin good. Only alcoholic products and tobacco products are considered as sin goods, irrespective of whether states or the Union, which levy the duty.

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There is a misconception that bringing petroleum will bring substantial benefit to the aviation and transport industry and even the manufacturing sector since petrol is a big input for them. It will be a benefit if only the rate of duty comes down. There is no certainty that if petroleum comes under GST, the tax rate will come down. It all depends on what the GST Council decides. If after giving the input credit, sufficient revenue does not come, surely the Council will jack up the rate to higher or the highest or even put a cess. It is an invalid argument that GST will bring down the rate of tax.

One must understand the difference between petroleum and other general products of merchandise like soap or paper or machinery. Petroleum is manufactured in refineries by, say, Indian Oil Corporation and sold to the same company’s dealers through their retailers. There is hardly any value addition. On the other hand, the general merchandise are sold through several wholesellers and many retailers where there is very high value addition. Value added tax is meant for such goods. For petroleum, the tax is practically on the manufacturing price and hardly on the value added. In any case, tax on petroleum is not evaded at all. The difference between GST and turnover tax on petroleum is only that there is no input credit in case of turnover tax. But it does not make any difference since the value addition is hardly there.

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In conclusion, I say the hurry to bring petroleum under GST is undue. There is constitutional provision for imposing a tax on it, but that does not mean it’s a low-hanging fruit. Once the attempt is made to bring it under GST, the fruit will go up and beyond the reach as states will not agree at all. At present, petroleum is an item, along with alcohol, which gives satisfaction to states they have some fiscal federalism left with them. This is a precious feeling which they will not part with.The writer is a retired member of the Central Board of Excise & Customs


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