Petrol under GST?

Ever since the rollout of GST on July 1, 2017, there have been talks about bringing petroleum products under the new tax net. With oil prices spiralling globally in the past few months, the talks have turned more serious with a few people who matter indicating that petroleum would also be a part of GST.

There is a view that GST would reduce the prices of petroleum products in the country and can act as an effective hedging tool to the price shenanigans of OPEC (Organisation of Petroleum Exporting Countries). The CGST Act already has a provision in place; Section 9(2) of the Act states that “the central tax on the supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the recommendations of the Council.”

Will prices drop?

The best answer to the question whether GST would really reduce the prices of petrol and diesel is: “It depends”. It would depend on a number of factors, such as: the rate of GST; whether the Centre is prepared for a further slippage in fiscal deficit; whether State governments would levy a local tax over and above GST; and whether the GST Council would recommend a cess over and above the peak GST rate of 28 per cent.

In the present structure, Central excise duty and VAT constitute a significant amount to the final price of petroleum products — in States such a Karnataka, the VAT on petroleum products is 30 per cent. State governments would demand compensation for loss of revenue on introduction of GST.

Compensation to States has been a highly disputed topic due to the lack of authentic data — the disputes would only get further complicated if GST subsumes VAT on petroleum products. Though GST revenues appear to be stabilising, they are still far from what could have been. In such a situation and with general elections next year, the government may opt to play it safe and leave GST untouched.

The GST Council also appears to be taking it a bit easy now — the earlier buzz around their monthly meetings has slowly faded. Levying a petroleum cess just to bring parity between the current rates and those under GST would also not serve any purpose — prices are not going to reduce since tax rates are almost the same and input tax credit cannot be claimed.

Permitting State governments to levy a local tax over and above GST is also a no-brainer — it would only create a further disparity in prices of petroleum products between States. In the present structure of taxation, a person driving from Bengaluru to Chennai will prefer to tank up petrol in Karnataka as it is cheaper by almost ₹3 to a litre. The very fact that such a differential exists vitiates the equity canon of taxation postulated by Adam Smith.

GST followers report that the tax may first be introduced on natural gas and aviation turbine fuel (ATF) — products that are not as sensitive to prices as diesel. Even before thinking of doing this, the Finance Ministry should have data on the impact the introduction of GST (without any cess) would have on the fiscal deficit and compensation outflow.

If the benefit to the consumers is minimal, the Council should seriously reconsider its decision of bringing petroleum products under GST. It has many other useful things to do, such as streamlining some of the existing onerous provisions. The timing is just not right for a “ Petroleum GST”.

The writer is a chartered accountant.