Why Gst on petrol & diesel price may not lower the fuel prices

Over the last few days, there has been a strong body of opinion advocating the case for bringing oil products under the goods and services tax (GST). There is no gainsaying the fact that petrol and diesel are one of the most heavily taxed products in India. For instance, about 45 percent of the price that a consumer pays for a litre of petrol at the pump go as taxes to the Centre and states.
GST, so the argument goes, will help sharply cut taxes in the two transport fuels, making it cheaper for people to tank up their vehicles. The basic assumption in this line of argument is that the GST rate for petrol and diesel will be fixed at the highest slab of 28 percent. Since GST, by definition will be a consolidated single levy, such a move will lower the tax incidence by about 17 percent, pulling down retail prices by several rupees a litre.
Such a deduction, elegant as it may appear, can be misleading.
For one, it disregards the states’, and the Centre’s, fiscal fixation for maintaining “revenue neutrality”. A revenue neutral rate (RNR) is the tax rate that results in similar tax earnings for the government despite changes in design or structure of the levies imposed.
One of the primary reasons why GST’s implementation took more than a decade was lack of consensus on the likely RNRs on many products.
Successive governments, both at the Centre and states, have used petroleum products as milch cows. In 2017-18, the Centre earned Rs 2.29 lakh crore from central excise duty on petroleum products, which is about 11 percent of the Centre’s total gross tax revenues of Rs 19.46 lakh crore earned during the year. Of course, a part of this was shared with states as part of an agreed devolution formula.
Likewise, states earn significant revenues from taxing petroleum products. This is particularly true for the richer or the so-called industrialised states such as Karnataka and Maharashtra.
In 2017-18, Karnataka, which levies a state value-added tax (VAT) of 30.28 percent on petrol and 20.23 percent on diesel, earned Rs 13,307 crore from taxes on petroleum products. This accounted for 14.5 percent of the states’ total tax revenues of Rs 91,718 crore, or for every Rs 100 that the Karnataka government earned in 2017-18, Rs 14.5 came from petroleum products alone.
Similarly, for Maharashtra. The state, which levies close 40 percent as VAT on petrol and about 25 percent on diesel, earned Rs 25,611 crore from taxes on petroleum products in 2017-18, which translated into 15 percent of the state’s total tax revenues of Rs 164,979 crore during the year.
The pattern is more or less similar across most states, illustrating how a disproportionately high amount of tax revenues are coming from just one set of products, both for the Centre and the states.
Given this historical peculiarity, states are unlikely to settle on a GST rate that would be lower than the RNR. What could be the possible revenue neutral GST rate for petrol and diesel? It would probably be in the range of 40-45 percent. Will a GST rate of 40-45 percent on the two fuels bring down their retail prices? Unlikely, because in the final analysis, the tax component on petrol and diesel prices at the fuel station remain the same.
The high tax structure in petroleum pricing is a painful legacy issue in a rather flawed design of India’s energy economics. States are unlikely to let go of their fiscal powers to tax petrol and diesel, and also settle for lower revenues. The Centre could also end up losing substantial earnings and may have look at other sources to reimburse states for their revenue loss.
At 40-45 percent, GST has nothing for the consumer. At best, it will help in tidying up the system by subsuming a welter of local and central levies into a combined tax.
A lower GST on fuel will have to come bundled with higher rates on some other products and services. One possible option could be to significantly hike the tax rates or cess for luxury, demerit and `sin’ goods. It will help offset revenue losses for the states and the Centre, fix a lower GST for petrol and diesel and also lower prices at the fuel station. After all, not many would mind GST at 28 percent for fuel, at the cost of higher tobacco prices. It will make tanking up cheaper, even if smoking becomes dearer.
Article courtesy: Money control