The decision of state finance ministers to oppose inclusion of petroleum products and alcohol from the ambit of Goods and Service Tax (GST) is not only against the spirit of a unified market, but is also likely to advance the discord between the Centre and the States on the scope of GST.

Undoubtedly, for an efficient, distortion-free and unified GST, inclusion of petroleum products and alcohol is a must. The reasons are not hard to understand.

Minimisation of tax cascading is the foremost objective of GST. Any decision to not include petroleum products under GST would produce a contrary result. The petroleum sector includes oil exploration and production, refining, transportation and pipelines, distribution and marketing.

At all these stages, substantial inputs of goods and services are acquired. For instance, various services such as survey and exploration of mineral oil or gas, cargo handling, transportation of goods by road, and so on, form an integral part of the sector.

Though all such inputs and input services would be taxable under the GST regime, the tax paid on their procurement would be non-recoverable if the petroleum products are excluded from the GST. Such non-recovery of input taxes would result in substantial tax cascading. The cascading will not only increase the cost of doing business, but would also have inflationary impact on the economy.

Similarly, exclusion of alcohol from the purview of GST would also result in an inefficient GST. Presently, the alcohol industry is subject to a plethora of taxes and duties — excise duty, sales tax, inter-state export and import fees, production licence fees, bottling fees and excise on adhesive labels or holograms.

The industry, accordingly, bears a substantial burden of taxes paid on the input raw materials, packaging and services, with no credit available for the input taxes.

Exclusion of alcohol from GST would deny the right of the sector to claim credit for the GST incurred on the inputs and services used in its production and distribution.

The exclusion is also likely to hamper the allied sectors by denying them the benefits of a simple GST framework.

For example, hotels and restaurants serving alcohol and departmental stores or other outlets, which sell both GST and non-GST items, would be affected by administrative complexities.

Despite the fact that non-inclusion of petroleum products and alcohol would result in inefficiencies and distortions, the state finance ministers are sticking to their position. The reason is apparent -- revenue loss! They could, instead, consider levying a supplementary excise duty, over and above the GST.

Read also: >Should petrol and alcohol be left out of GST? Yes

(The author is Tax Partner, E&Y. Views are personal.)

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