India consumes about 2,639 crore litres of petrol and 9,306 litres of diesel annually. Any reduction in taxation shall significantly dent total revenues. Under the GST slab, it shall amount to a loss of about ₹3.17 lakh crore for GoI and ₹1.1 lakh crore for state revenues – a total revenue loss of ₹4.27 lakh crore.
Sushil Kumar Modi
BJP Rajya Sabha MP and former deputy chief minister of BiharIn its 45th meeting on September 17, the Goods and Services Tax (GST) Council deliberated on the directions of the Kerala High Court as to whether specified petroleum products are to be included under GST or not. It maintained the status quo, and decided not to bring petroleum taxation under a uniform GST rate.
Whenever fuel prices experience adverse volatility, the demand to contain inflationary retail prices becomes a clamour. Initially, the rationale seems straightforward: subsuming petrol and diesel in GST will reduce the levies on base prices – from the current 134.37% and 116.32% respectively to the highest GST slab of 28%. But the trade-off entails forgoing 106.3% in petroleum taxes and 88.32% in diesel taxes by the central and state governments. This is equivalent to a revenue loss of ₹4.27 lakh crore – about ₹1.9 lakh crore in petrol and ₹3.19 lakh crore in diesel.
So, is sustaining such a revenue loss feasible politically or economically? What about determining alternative taxation sources, ensuring funds for development programmes, and sustaining infrastructure expenditures? Considering the limited scope of alternatives and a constrained fiscal space, this seems infeasible.
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The central and state governments get ₹51.45 a litre from petrol and ₹45.26 a litre from diesel sales. Bringing them under GST would reduce the collection to ₹10.72 and ₹10.90 respectively – a loss of ₹40.69 a litre for petrol and ₹34.36 a litre for diesel. India consumes about 2,639 crore litres of petrol and 9,306 litres of diesel annually. Any reduction in taxation shall significantly dent total revenues. Under the GST slab, it shall amount to a loss of about ₹3.17 lakh crore for GoI and ₹1.1 lakh crore for state revenues – a total revenue loss of ₹4.27 lakh crore.
On May 6, GoI increased the road and infrastructure cess from ₹10 a litre to ₹18 a litre. From this cess, ₹59,662 crore were allocated towards road construction in 2020-21. In the current fiscal, ₹50,000 crore from the cess collections have been earmarked for Jal Jeevan Mission’s ‘Har Ghar Nal’ scheme, and ₹79,147 crore towards roads construction. The rest has been dedicated to other infra sectors like railways, airports, power and communication. Even state governments are granted a certain portion of the road cess for road construction.
On February 2, GoI had decided to levy a new agriculture and infrastructure development cess of ₹2.50 a litre on petrol and ₹4 a litre on diesel. But GoI had then ensured neutrality of tax burden on consumers by commensurately decreasing the excise duty on fuel. The expected revenues of about ₹30,000 crore from this cess are to be directed towards agricultural mandis, storage, processing and other infra-related expenditures in the sector. GoI also collects excise duty at the rate of ₹12.40 a litre on petrol and ₹9.80 a litre on diesel. Out of this, 41% is devolved to state governments.
The price for Indian crude oil basket has more than doubled from $33 a barrel in March 2020 to over $74 a barrel in September 2021. Remember, central government taxes are specific, fixed levies, irrespective of international prices. But state governments have the prerogative of imposing their own rates for value-added taxes (VAT), which are ad valorem taxes – tax revenues automatically rising and falling with prices. Under GST, they can access at most 14%, the state GST (SGST) component of the tax levy. While states collect an average of ₹18.55 a litre on petrol and ₹13.46 a litre on diesel, there are variations from state to state. This gives state governments flexibility and independent agency.
Taxes from fuel constitute a significant chunk of state revenues. Reducing the rate for fuel taxes will have severe consequences in states’ abilities to fund social and welfare programmes, rendered even more pressing due to the economic scars of the Covid-19 pandemic. At such a juncture, GoI stepped up its spending to keep the economy afloat. It was also essential to boost employment through capital expenditures. GoI expects capital expenditures to reach ₹5.54 lakh crore in the current fiscal.
Bringing fuel taxes under GST regime will pose painful trade-offs, and the policy choice could come at considerable socio-political costs of restraining development and inviting public anger. Countries like France, Germany, Britain, Spain and Japan have costlier petrol than India. In many countries, petroleum products are ‘sin taxed’ the highest like tobacco and liquor. India, being reliant on imports for 85% of its crude oil demand and short of alternative revenues, has little choice now.
But looking ahead, when international prices fall and corporation, GST and income-tax revenues rise as the economy’s growth is back on track, a revision of rates, or the prospect of GST applicability, is certainly warranted. But not now.