Petrol and diesel bring in huge revenues to both the Centre and the State governments. Fuel taxes were projected to contribute almost ₹6 lakh crore to the Central and State exchequers combined in 2020-21.
The story so far: The Goods and Services Tax (GST) Council last week decided to let petrol and diesel remain out of the ambit of the GST, at least for now. The discussion on including the domestic fuels under the GST was taken up by the Council after a nudge by the Kerala High Court, but members of the Council chose to opt for the status quo.
Why is there a demand to bring petrol and diesel under the GST?
The climbing cost of petrol and diesel has increased pressure on the government to reduce taxes on the fuels in order to rein in their pump prices. The price of petrol has risen above the ₹100-mark in major cities across the country. The government has blamed rising international crude oil prices for the increase in domestic fuel prices. India imports more than 80% of its oil supplies and the price of crude oil in the international market does have a significant impact on domestic fuel prices. However, high taxes are also seen as a major reason for the rise in fuel prices. It should be noted that more than half of the money paid by the consumer to purchase fuels goes towards some tax or the other. Even when international crude oil prices decline, the government has tended not to let domestic fuel prices drop. Instead, it has in the past raised taxes to capture the windfall gains that could accrue to oil companies. For instance, even though the prices of international crude oil futures dropped to less than $20 a barrel in April last year due to the huge drop in demand during the global COVID-19 lockdown, the domestic retail price of petrol and diesel continued to stay high. The government says it increased taxes on fuels to compensate for the loss of other revenues. Opposition parties and even the RBI have urged the government to slash taxes to make fuels not only more affordable for the consumer but also to lessen the second-order inflationary impacts since diesel is the main fuel used by road freight operators, and its high price pushes up transport costs.
Why are Central and State governments reluctant?
Petrol and diesel are two of the most highly taxed goods in the country and bring in huge revenues to both the Central and State governments. Fuel taxes were projected to contribute almost ₹6 lakh crore to the Central and State exchequers combined in 2020-21, and bringing domestic fuels under the GST would effectively mean reducing taxes on them. The highest tax slab under the GST is 28%, while the fuels such as petrol and diesel are taxed at more than 100% currently. So both the Centre and the States are reluctant to lower taxes. The States, in particular, are wary of losing even more of their already curtailed independent power to raise tax revenue by allowing petrol and diesel to be brought under the ambit of the GST since it would make them further dependent on the Centre to receive their share of the taxes. At the moment, the States can independently impose a value added tax on petrol and diesel. The Centre and the States have also justified their decision to tax fuels heavily by saying that the revenue collected helps them fund social programmes. Critics of the government’s policy of imposing high fuel taxes, however, argue that high taxes are a drag on the economy. If taxes are reduced, not only would more petrol and diesel be consumed but the money saved by motorists on this count could likely be diverted to other parts of consumption spending, thus boosting economic growth. And if the increment to overall economic output is greater than the revenue foregone through a reduction in the tax rates, the governments could end up actually collecting more revenue than under the current high fuel tax regime.
What lies ahead?
Since the revenues of both the Centre and the States will be heavily affected by a lower tax on petrol and diesel, it is unlikely that these fuels will be brought under the ambit of the GST any time soon. Even if these fuels are brought under the GST, there is likely to be a steep rate imposed on them to prevent any loss in tax revenues. So the real question is not whether the Centre and the States are willing to bring fuels under the GST but whether they truly wish to reduce taxes on fuels. It should be noted that the share of the final price of petrol that goes towards taxes has increased from approximately 30% in 2014 to about 60% now. So, a scenario in which there is no further increase in fuel taxes may be the best that consumers can hope for.