- If the states agree on the central governments’ proposal to bring petroleum products under GST, then the prices of petrol and diesel could be brought down to a substantially lower rate.
- The state government levies Ad valorem tax (“according to value”), which means that this tax changes with a change in oil prices.
- However, this would lead to significant revenue loss to the Union government as well as the state government.
Everyone seems to be discussing the recent increase in petrol and diesel prices; some are blaming the rise in crude oil prices in international markets as the reason behind this, while others are blaming high taxation by central and state governments. To be fair, all three factors are responsible for the price rise. Now the big question is how oil prices can be brought down in the domestic markets. Well, if the states agree on the central governments’ proposal to bring petroleum products under GST, then the prices of petrol and diesel could be brought down to a substantially lower rate.
While most of the products were brought under the new indirect tax regime, petroleum products, liquor, and electricity were kept outside as most of the states were not consenting to bring these products under the GST. The reason behind the disagreement by the states is that most of their taxes come from these products, and they would lose flexibility in the imposition of taxes once these are brought under the purview of GST.
In the present system, the central government imposes a fixed central excise duty on petrol and diesel, which is currently Rs 32.80 per litre on petrol and Rs 31.80 on diesel. The state government levies Ad valorem tax (“according to value”), which means that this tax changes with a change in oil prices. Whenever the price increases, the tax also increases, and vice versa.
For example, if the price of oil is Rs. 100 and the tax on that is 20 per cent then the consumer has to pay Rs. 20 as a tax, but when the price is Rs. 200 then the consumer has to pay Rs. 40. Different states have different tax rates on petroleum ranging from 40 per cent to 10 per cent. Therefore the petrol which a dealer gets from oil marketing companies at the price of approximately 40 reaches 100 in some states while 90 in others, it varies according to the tax imposed by states government. If petrol and diesel are brought under GST, the price will be uniform across the country.
Bringing petroleum products under GST will reduce the burden of taxes on common people because the highest tax slab is under 28 per cent, even the prices would be substantially lower than what they are today.
Currently, the price of crude is 75 dollars per barrel and a barrel has around 150 litres. So, according to this, the price of the raw material is around 35 rupees per litre and if we keep the processing fee and dealer commission 5 rupees per litre, then it would be around 40 rupees to oil marketing companies. With, 28 per cent tax on that, the maximum price of petrol and diesel to consumers would be around 50 to 55 rupees.
So, if petrol and diesel are brought under GST, the price of these products would be reduced by half.
However, this would lead to significant revenue loss to the Union government as well as the state government. The Union government, which earned around 3 lakh crore rupees in excise collection in the last fiscal year, would not get even 1 lakh crore rupees under the new regime because whatever revenue comes to the government under GST is also shared with states (42 per cent) under the Finance Commission devolution, unlike excise duty which the government keeps to itself.
But, given the fact tax collections are rising exponentially (an increase of 86 per cent in the first quarter of the ongoing fiscal year), the Union government may take this bet to give a further boost to the economy.
Economists and policymakers are also in favour of bringing petrol and diesel under GST. Reputed economist and Chairman of the Economic Advisory Council to the Prime Minister (EAC-PM) Bibek Debroy, was asked in an interview whether he is in favour of bringing petrol and petroleum products under GST? He replied, “I am in favor of bringing everything under GST.” So, it is very likely that the government would walk the talk on petrol and diesel in the coming weeks.