To make GST efficient, petrol, diesel must be in its net

Initial reports of high tax collection under the newly implemented Goods and Services Tax Act (GST) were received with euphoria in some quarters in India. A clearer picture only emerged later to refute it. The adoption of GST to replace a myriad of taxes was a monumental victory for the NDA. It is a reflection of the strength of Indian democracy that states readily gave up their prerogative to impose taxes and fix rates to create “one nation, one tax (albeit with several levels), one market.”

While petroleum products like LPG, kerosene, and naphtha are under the ambit of GST, five products are not: crude oil, natural gas, aviation fuel, petrol, and diesel. Though this was influenced by the reality that some of these are cash cows for central and state governments, if enough planning had been done, they could also have been brought under GST.

Of those five petroleum products, petrol and diesel are the real cash cows. In 2016–17, revenues to the Centre and states from these two products totalled Rs 4.1 lakh crore — a significant percentage of total indirect tax collections. The excise tax on petroleum products accounts for 56% of total central government revenues from excise taxes on all products.

Fall neutralised
International crude oil prices have fallen by more than 50% since 2014. But petrol and diesel prices have been increasing in India. Currently, they are at nearly the same level as in May 2014. Increase in taxes have neutralised the fall in oil prices.

There are two kinds of taxes — Central excise tax and state sales taxes. Excise and sales taxes account for 51.8% and 44.3% of petrol and diesel retail prices respectively. GST has five tax levels: zero (exempt), 5, 12, 18 and 28%.

Current average state sales tax on petrol is 31% and on diesel is 23%. In addition, states also get 42% of the central excise tax, which is 27%. When petrol and diesel are brought under GST, maximum tax than can be charged is limited to 28%, which has to be shared between the Centre and the states. This will result in both the central and state governments losing considerable amounts of revenue. However, this fear on the part of the Centre and states is ill-founded.

In most developed and developing countries where there is VAT (similar to GST), each government has succeeded in getting higher revenues from petrol and diesel by imposing additional duty on top of the VAT rate of 15 or 20%. India could adopt a similar strategy. In the case of automobiles, the GST council has already imposed 45-50%.

States may still raise objections about losing the autonomy to raise revenues. Five states have sales tax rates above 35% on petrol. Maharastra has as high a rate as 47.6%. As a result, Mumbai has the highest petrol price of Rs 79.54, while Delhi has Rs 70.43 with a lower VAT of 27%.

In most countries around the world, petrol and diesel fuels are highly taxed to mobilise resources to the government to improve roads. These taxes may be considered more as service fees to be collected from those who use roads. However, in the case of India, excise revenues from petroleum products are used for general purposes like welfare and to promote development. Thus, higher tax on petrol and diesel help the poor more than they hurt, directly or indirectly, the middle and rich classes.

One way to fight global climate change and reduce greenhouse gases, an urgent need, is to reduce the consumption of petrol and diesel by imposing higher taxes on them. In addition to streamlining GST, India can justify imposing an excise tax on petrol and diesel and share part of these revenues with the states as they currently do. This should incentivise state governments to bring petrol and diesel under GST.

The Centre wants to ban internal combustion engine vehicles and replace them with electric vehicles. The higher petrol and diesel price policy will facilitate such a game-changing initiative.

Improve compliance
The current five tax rates may be reduced to two or one in the future to simplify GST and improve compliance. More products may be brought under GST. Then, the maximum tax rate could be reduced considerably below 28% without affecting tax revenues. Even with lower tax rates, the excise tax can be adjusted to ensure higher petrol and diesel prices, as is the practice in most countries where VAT is levied. In the UK, the cost of petrol is Rs 112/litre, of which VAT is Rs 24/litre and excise duty is Rs 48/litre.

Most consumers and those who support bringing petrol and diesel under GST will be unhappy with this policy, if adopted. Some who support bringing these products under GST have argued that such a strategy will bring down the price. This is true if no additional excise is imposed, but that is not a realistic assumption. Such supporters are likely to be disappointed.

It is surprising that the Congress party is demanding that the government bring petrol and diesel under GST so that prices will come down. Is this a political game just for the sake of opposition? Of course, if the BJP was in the opposition, it would have done the same.

Leaving important products like petrol and diesel out of the GST net complicates the entire tax collection system. For example, a refinery that pays GST for procurement of plant, machinery, services, etc., will not be able to claim credit against the excise and sales tax levied on petrol and diesel. The earlier we bring petrol and diesel under the ambit of GST, the better the overall efficiency of GST.