Under GST or not, petrol, diesel prices won’t fall. Stop dreaming

Over the last few weeks, WhatsApp forwards going around were suggesting that petrol and diesel were likely to be brought under GST, and once that happens, fuel prices would fall.

Petroleum products like petrol, diesel, natural gas and aviation turbine fuel, are constitutionally included under the GST, but the date on which GST shall be levied on such goods depends on the decision of the GST Council. The GST Council discussed this issue in their latest meeting, primarily on account of the Kerala High Court asking the Council to decide on bringing petrol and diesel under GST. The Council decided against this.

The reason is obvious. Between April 2015 and March 2021, the central government earned Rs 13.7 lakh crore from the excise duty it charges on petrol and diesel. These earnings have only gone up in recent years because the excise duty on petrol has gone up from Rs 9.48 per litre in October 2014 to Rs 32.90 per litre currently, a jump of close to 250%. The excise duty on diesel has gone up from Rs 3.56 per litre in October 2014 to Rs 31.80 per litre currently, a jump of close to 800%.

In just three months this year -- April to June -- the excise duty collected on petrol and diesel stood at Rs 94,181 crore. Given this, the excise duty that the government collects on petrol and diesel sales will cross Rs 4 lakh crore this financial year. Remember, sales of petrol and diesel would have been lower than normal during April-June, when the second wave of the pandemic was at its peak.

Also read: Time not yet ripe for petrol, diesel to come under GST: Council

The gross tax revenue that the government hopes to earn this year is Rs 22.17 lakh crore. Hence, at Rs 4 lakh crore, the government hopes to earn 18% of its total tax revenues from the excise duty on petrol and diesel. To cut a long story short, the central government is highly dependent on fuel taxes.

Other than the central excise duty on petrol and diesel, the state governments also charge a sales tax/VAT. This rate varies from state to state. In 2020-21, the state governments earned a total of Rs 2.03 lakh crore from taxes on petroleum products, mostly on petrol and diesel.

In 2020-21, the revenues of the state governments from their own taxes stood at Rs 14.93 lakh crore. That means, some 13.6% of the total taxes they collected (without taking their share in taxes collected by the Centre into account) came from taxing petroleum products. The share was at 15% and 16.7% in 2019-20 and 2018-19, respectively. What this tells us very clearly is that both central and state governments are addicted to fuel taxes.

In this scenario, what is the possibility of petrol and diesel being brought under GST? To understand this, we need to understand how petrol and diesel are taxed.

Let’s take the example of petrol. As per Indian Oil Corporation, on September 16, a litre of petrol cost Rs 101.19 in Delhi. The price charged to dealers was Rs 41.1 per litre. The dealer commission was Rs 3.84 per litre. This works out to Rs 44.94 per litre. The remaining Rs 56.25 per litre was the total amount of tax on petrol. Of this, Rs 32.9 per litre was the excise duty charged by the central government, and the rest was the sales tax/VAT charged by the Delhi state government.

So, the total tax on petrol stands at about 125% of its dealer price plus commission. This will vary from state to state, given that the rate of sales tax/VAT is different from one state to another. Nevertheless, it is safe to say that in most cases, the rate will be higher than 100%, except possibly in Andaman and Nicobar Islands, where the VAT is 6%. In most states, the sales tax/VAT is more than 25%. In Karnataka, the sales tax on petrol is 35%.

In the case of diesel, the math might be slightly different, but the proportion of taxes remains as high, or more, in comparison to the dealer price-plus-commission. Also, in 2020-21, more than two-thirds of the central excise duty earned from petroleum products came from diesel. It was at 56.6% in 2019-20.

Hence, even if petrol and diesel are brought under GST, they will have to be taxed at a very high rate. Currently, the highest rate of GST is 28%. Of course, there are surcharges and cess that can be charged by the government over and above this.

Also, the impact of moving petrol and diesel into the GST regime needs to be ‘revenue neutral’. That means that both the central government and the state governments need to continue to collect more or less the same amount of taxes that they are currently earning under the non-GST regime. That is possible only if the GST rate on petrol and diesel is higher than 100%.

Hence, the logic offered on WhatsApp forwards and in private conversations of petrol and diesel prices falling if they are brought under GST doesn’t really hold. The only way this is possible is if the governments, both central and in the states, start earning more taxes through some other route.

Until that happens, the taxes on petrol and diesel will continue to remain high, and thus petrol and diesel prices will continue to remain high. Of course, if international oil prices fall and our oil marketing companies decide to pass on the fall to the consumer, then prices may go down. But that’s true under GST or otherwise.