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GST on Petrol & Diesel: Real Reason why the Govt is going back & forth on it

There is no denying the fact that petrol and diesel prices have broken all past records and breached the ₹100 marks in several parts of the country. These sharp hikes in the prices are pinching the pocket of the common man. 
 
According to some experts, the reason behind the ruinously high cost of gasoline may be an exclusion of this item from the GST regime due to which, every state imposes different VAT on petrol and diesel. 
 
The result of this, obviously, is price variations in every state on petrol and diesel. Perhaps if it comes under the GST regime, we can get a relief of higher rates and resolve this problem. Because after that the government can impose a fixed percentage (highest 28% not more than that) on the fuel. Also, this will make the prices of petrol and diesel uniform across the country. But it’s not as simple as it seems.  
 
Challenges in bringing fuel under GST
 
First, Goods and Services Tax (GST) is an indirect tax that replaces taxes (indirect) in India like state tax or VAT, Centre tax or excise duty, etc. This act was passed on 29th March 2017 in the Parliament and came into effect on 1st July 2017. But there are certain items that are not covered under GST such as Petrol, Diesel and Alcohol. 
 
The reason is; these items contribute a remarkable amount of revenue to the states and Centre. 
 
VAT is Value Added Tax that is imposed by the state government on items to earn state revenue. Now the problem is every state applies VAT as per their own requirements and the people of that state have to pay it.
 
For instance, Punjab imposes approx. 33.40% taxes on petrol and 19.77% on diesel. Whereas, approximately VAT percentage in Chandigarh on petrol is 22.45 %.
 
In Maharashtra, VAT on petrol is 26% + Rs.10/Ltr, VAT on diesel 24% + Rs.3/ltr and Maharashtra earns estimated revenue of ₹25,000 crores annually.
 
Similarly, in Haryana VAT on fuel products is 26.25% and as per a few sources, recently the Haryana Government decided to increase this percentage. It means there is a possibility to see a hike in petroleum prices.
 
As per a reliable report, Maharashtra has the highest VAT on petroleum and hence earns the maximum from fuel selling however Andaman & Nicobar has the minimum VAT at 6% on petrol & diesel and hence earns the minimum. O
 
On the other hand, the central government also earns a significant amount by levying taxes on petroleum products. It clearly indicates that petrol and diesel contribute hugely in collecting revenue for states and centre governments. 
 
So, if petroleum is brought under the GST regime, both (centre and state) the taxes would be merged and prices would be uniform across the country.
 
So, these are the difficulties to bring fuel items under the GST regime. Well, in between the discussion of higher fuel prices, Finance Minister, Nirmala Sitharaman, specified that the state and union government both have to work together to bring the prices to economic prices. 
 
What if they are brought under the GST Regime?
 
If the government will bring petrol and diesel under GST, there is a high possibility that we see a significant fall in the prices. Additionally, petroleum will sell at uniform prices in every part of India. Isn’t it a cool option? But, some economists believe that we can buy petrol at ₹ 75 a litre and diesel at ₹ 75 a litre across the country if they come under GST.
 
But somewhere there is a possibility, if the government will bring them under GST, they surely apply the maximum percentage, i.e. 28% on it to compensate for the revenue loss. Also, additional cess will be applicable. At the end, we will find only ₹4-5 a litre fall in the prices.
 
Still, many states are ready to bring the petrol and diesel under the GST regime opposite to the perception that they are against the concrete proposal which involves the compensation mechanism through the centre.
 
Meanwhile, while some states are in favour of this, many with high VAT percentage are opposing it. For instance Kerala FM Thomas Isaac said: “Compensate us for the tax shortfall arising on account of subsuming fuel under GST. We are ready. Let this be discussed in the Council meeting. But compensation has to be worked out in conjunction with states.”
 
West Bengal FM Amit Mitra says the Centre might not be interested to take amendments as it earns “Much More” from taxes on petrol and diesel. He also added that revenue from taxes on fuel accounted for 70% of the central taxes on petrol at present and these were not distributed through the method of devolution.
 
Another side of coin though is that if petrol & diesel come under GST, definitely it would be a big relief to the people of states that impose heavy VAT on petroleum but what about those states people that impose very little VAT? 
 
Certainly, it will impact their earnings and revenue to a great extent. It can enhance the transport expenses and put a burden on them. Additionally, the Centre and state governments will face a big reduction in tax collection.
 
Here’s how much tax you pay on fuel
 
You will be surprised to know that the basic price of oil is only Rs.26.34/L (As per a report from the Petroleum Planning and Analysis Cell). The rest are taxes, excise duty, etc. 
 
You have to pay different taxes on fuel that are:
  1. Raw oil tax
  2. Refinery tax
  3. Excise Duty (imposed by Central Govt.)
  4. Dealer Commission
  5. VAT (imposed by the State Govt.)
  6. Road Development Cess (imposed by State and Central Govt)
  7. Other Cess (imposed by State and Central Govt)
 
Here’s an example for your understanding. In Delhi, the base price of diesel is Rs 27.08. The commission of dealers on diesel in Delhi is 2.53 rupees per litre. Then centre Govt. adds 31.83 rupees per litre as excise duty. State Govt. adds 10.64 rupees per litre as VAT on diesel. This way the total tax on diesel in Delhi is more than 59%.
 
Similarly, the Centre charges Rs. 32.98 (125 per cent of the base price) as excise and the Delhi government levies Rs. 19 (72 % of the base price) per litre on petrol VAT.
 
India has the highest taxes on fuel in the world. Here’s a glimpse: 
 
  • India – 69%
  • Italy – 64%
  • France – 63%
  • Germany – 63%
  • Britain – 62%
  • Spain – 53%
  • Japan – 47%
  • Canada – 33%
  • USA – 19%
 
What’s the way out then?
 
To earn the present profits on fuel and fuel-based products, the Government has to take approximately 280% of tax, which is impossible. So, a plausible solution is that the Government of India first come up with an alternative to earn money. But, one also needs to understand that levying higher taxes on essential items will lead to a huge financial burden on the common man. 
 
Another way to address this challenge; the government can create an oil price stabilization fund. This fund will be used in tough times (when the country is ailing financially to) compensate for the revenue loss by cross-subsidizing funds saved from when inflation is low, without hurting the common man.
 
Other than that, economists suggested a graded and advanced subsidy should be given to poor consumers which can be gradually lessened over a period. 

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