Indian Tax Solution
The murmurs on rising prices of petrol and diesel reached a crescendo last week when the fuel prices across major cities hit three-year highs. Oil Minister Dharmendra Pradhan was swift to present an explanation as he said that the prima facie reason for the spike was a shutdown in US refineries due to hurricane Irma which made global crude oil prices rise.
He also said that the petroleum ministry has requested the Ministry of Finance to bring petroleum products under the ambit of Goods and Services Tax (GST) in a bid to reign in the Value Added Tax (VAT) charged by various states. "There are two kinds of taxes (on petroleum products). One is the central excise and the other one is state VAT. That is the reason we are expecting uniform tax mechanism from the industry point of view," Pradhan said.
It is thus a good time to look at how the math behind including petro products under GST works out. Or does it not?
The existing tax structure
Currently, consumers pay three major taxes on petrol. These taxes include Excise Duty (charged by the centre), VAT or Value Added Tax (charged by respective states) and the dealers' commission.
For example, let us take the case of Delhi. On September 13, when the uproar on high prices broke out, a dealer in the capital city paid Rs 30.70 for a litre of petrol. On top of this, the centre charged Rs 21.48 per litre as excise duty and the state government charged 27 per cent as VAT which amounted to Rs 14.96. Moreover, the dealers charged a commission of Rs 3.24 and thus a litre of petrol cost a consumer Rs 70.38.
Thus, a consumer paid Rs 39.68 as additional charges which amounts to 129.25 per cent of the base price which a dealer pays.
How GST may change the scene?
In case, GST is applied on petro products, it will stand to subsume both VAT and excise duty and will be replaced by one of the four broad tax slabs of the new tax regime. Assuming that fuel is charged even under the highest tax slab of 28 per cent, the prices of petroleum products will fall sharply.
For instance, if 28 per cent GST is levied upon the dealers' base price of Rs 30.70, the consumer will have to shell out Rs 39.30 for a litre of petrol, which is Rs 31 less than the existing price.
Is GST the solution then?
While it may come across the simplest solution to tackle rising fuel prices, inducting petroleum products into GST does not really augur for good economics. As explained, such a move will take a major hit on revenues and the state exchequer will only be poorer.
In fact, the government's rationale behind not including fuel in GST was to insulate states from loss of revenue. The state of Delhi earns 27 per cent VAT from sale of a litre of petrol. On top of that, the states also receive 42 per cent of the Excise Duty charged by the centre, according to Oil Minister Dharmendra Pradhan. Thus, the state earns Rs 23.98 from sale of each litre. In case, the 28 per cent GST is applied, the states will be entitled to 14 per cent of it in the form of SGST (State goods and Services Tax) which will amount to Rs 4.29, thus causing a loss of Rs 19.69 per litre to the state exchequer.
The GST Council and the finance ministry has yet not responded to the petroleum ministry's plea of bringing petrol and diesel and under the GST ambit. If and when the GST Council agrees to impose GST on petro products, it seems unlikely that any of the existing tax slabs will be able to suffice the revenue requirements. In such a case, the council may opt to levy an additional cess on fuel, as in the case of large sized cars and SUVs (Sports Utility Vehicles).
Meanwhile, the oil minister has said that fuel prices may come down by Diwali which is next month. However, he did not elaborate how that may happen. But, if the prices cease to reduce, Finance Minister Arun Jaitley will have a tough task at hand juggling the ire of consumers, interest of various states and the pressure of keeping the government's coffers healthy.
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