Why GST on petrol, diesel may not mean cheap fuel

Contrary to popular notion, bringing petrol and diesel under the Goods & Services Tax (GST) regime may not make them significantly cheaper.

There is growing pressure on both the Centre and the States to lower taxes on the two fuels and bring them under GST. However, a greater challenge before the GST Council will be fitment of tax rates for them. If 28 per cent GST is levied, petrol in Delhi will cost ₹43.52 a litre, down from the current ₹70.46, and diesel will cost ₹42.17 a litre (currently ₹58.70). However, things may not play out quite this way.

Traders and analysts believe that GST will bring down retail prices by only about ₹4-5 a litre, as there will be a cess on top of the 28 per cent GST in order to compensate the States and the Centre for the revenue loss.

“Petrol and diesel are not sin (luxury or demerit) products, and yet, the GST rates for them have to be at the highest category, that is, 28 per cent. Various cesses will be added to this to ensure that States are compensated,” says a senior oil company executive.

Taxes on auto fuel are a double-edged sword for the government right now. If the taxes are reduced, it would make a deep dent in the States’ finances and strain the Centre’s purse. But if prices don’t come down, it will dent the vote bank.

There is a belief that the current flare-up in fuel prices can be addressed by correcting the tax structure: the Central Excise Duty (which is specific) and the Value Added Tax (VAT) by the States, is ad-valorem.

The final call will be with the GST Council, but it seems far-fetched, officials in the government say.

The current price spike, which has hurt consumers, has been to the government’s advantage, more than oil companies. The base price of petrol and diesel since 2014 has increased only by ₹2-3 a litre. What has increased is the tax component on these products. Since 2015, the excise duty on petrol has been hiked by ₹11.77 per litre and on diesel by ₹13.47.

The VAT component, which is levied by the States, is as high as 48 per cent in Maharashtra (Mumbai) for petrol; for diesel, it is 38 per cent in Madhya Pradesh.

A senior BJP member said, “It is unlikely that the States – whether BJP-ruled or non-BJP — will agree (to waive the VAT component) as many of them are significantly dependent on revenues from these two products.

“And if they are brought under GST, the States will seek compensation for the losses; you cannot expect the States to redesign their revenue earning sources overnight.”

All GST will do is bring uniformity in taxes; it will not mean taxes will come down down, another oil executive said.

Harpreet Singh, Partner, KPMG, said, “Since the current tax incidence on petrol and diesel is quite high, the government can put the products in the 28 per cent slab and levy an additional cess. This will be similar to the case of demerit goods such as tobacco and luxury cars and will lower the impact on the exchequer when the products are brought under GST.”

Singh said the refineries’ bottomline has been hit by the input credit build-up. “The tax of services has gone up from 15 per cent to 18 per cent after GST.

“But this cannot be offset against the output as petrol and diesel are not under the GST regime,” he said.