Tuesday, January 18, 2022

GST on fuel: A price vs revenue trade-off

The rise in global crude prices after August 2020 has led to a rapid rise in fuel prices across the country, which has sparked a demand for including petrol and diesel under GST. It is a huge misnomer that merely including these items under GST would lead to a lowering of pump prices since the maximum rate on these products would be capped at 28 per cent. While a decision to subsume petrol and diesel in GST would ultimately lie with the GST Council, prices can be lowered only by lowering the revenue that currently accrues to both the Centre and the states on the sale of these products, whether under GST or outside it.

With the Centre and the states expected to earn around Rs 5.5 lakh crore by way of revenue from petrol and diesel during the current fiscal year, prices cannot be lowered even reasonably unless there are widespread tax cuts by both the Union and all the states.

The Union and state levies put together account for roughly 55 per cent and 52 per cent of the retail price of petrol and diesel respectively; these work out to around 135 per cent and 116 per cent of the base prices of the two products respectively. It is also interesting to note that the central levy on petrol and diesel works out to around 36 per cent of the retail price while the state component is around 20 per cent (diesel) to 28 per cent (petrol).

Moreover, it is worth noting that of the total central levies on petrol and diesel, Rs 1.40 per litre and Rs 1.80 per litre is the basic excise duty for the two fuels, and Rs 11 per litre and Rs 18 per litre is the special additional excise duty. Both these components form part of the divisible pool of taxes, 42 per cent of which (approximately Rs 52,000 crore) goes to the states. The remaining portion of Rs 18 per litre in both cases is the Road and Infrastructure Cess and Rs 2.50 per litre and Rs 4 per litre is the Agriculture Infrastructure and Development Cess which are retained by the Centre, to be used only towards road and agricultural infrastructure development.

With such heavy taxation, prices cannot be brought down unless taxes are cut. However, revenue from these products forms such a significant component of overall government revenue that significant tax cuts would be accompanied by significant loss of almost assured revenue, since bulk of the revenue from these products is contributed by public sector undertakings.

Being demerit goods, fuel oils and liquor are almost universally subject to a dual levy by countries that implement any kind of VAT or GST. The levy is a mix of GST at a fixed percentage of the price which qualifies for credit in the value chain and a fixed amount or percentage of the price which is not creditable and is thus outside GST. Punitive taxes of this order are levied primarily to discourage consumption of environmentally degrading fossil fuels and to garner revenues to fund infrastructure, while the creditable component enables offsetting of taxes on basically capital inputs.

Written by Sushil Kumar Modi

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