An analysis: Is it worth bringing Petrol, Diesel under GST?

Towards the end of February 2021, there was much ruckus through out the country owing to the increase in Petrol and Diesel prices. Albeit the increase in Petrol and Diesel prices was nothing new if we consider the Petrol & Diesel prices from a decade back to today and the number of times the prices have increased. In June 2010, petrol was Rs. 47.92 per liter and Diesel Rs. 38.10 in New Delhi both of which stand at Rs. 91.17 and Rs. 81.47 respectively today. However, the ruckus was much louder this time since it was the first time that in some states the Petrol price crossed Rs. 100 and India became the highest tax levying nation in the world on fuel prices.

There has been much debate about the crude oil prices in the international market which have been considered the culprit for the rising prices. To consider the facts: A barrel of crude oil cost $71.21 in 2010 and costs $67.22 today. In Indian units, a barrel of oil consists of 159 liters of oil. There is clearly a decline in the international crude oil prices owing to several developments taking place in the oil producing countries which somehow increased the competition between them, and they became ready to sell their oil at lower prices. In last 1 month, oil prices have been reported to decline twice in the international market.

So, the question arises why the petrol, diesel prices are going up in India instead of declining?

The answer lies in the fact that most of the money paid for 1 liter of Petrol or Diesel is collected as a tax by the Central and State Governments. Central Government levies Excise duty and the State Governments levy Value Added Tax (VAT) on the fuel. In addition to the taxes levied, the prices include a small portion of dealer’s commission as well. As per the latest report, the distribution of Excise duty, VAT and dealer’s commission on fuel prices is illustrated in the figure below:

 

As per the above report, a liter of petrol costs Rs. 33.54 to the dealer. Central Government then levies an excise duty of Rs. 32.9. VAT applied by the State governments vary across states but is nearly 30%. This is the reason Petrol and Diesel have different prices in different states. In Delhi, the VAT levied is Rs. 21.04. The dealers earn a commission of Rs. 3.69 on Petrol in Delhi. So, the total price of a liter of Petrol in Delhi becomes [Rs. 33.54 (Base Price) + Rs. 32.9 (Excise) + Rs 21.04 (VAT) + Rs. 3.69 (Dealer Commission)] Rs. 91.17 as of 1 March 2021.

Since the Petrol and Diesel prices have touched such heights for the first time owing solely to the taxes levied which sum up to nearly 70 percent of the total price of the fuel, the debate to have a uniform tax on fuel across the country does suffice. So, does bringing the fuel under the ambit of GST do any good?

Let us consider the facts:

Central and State Governments generate a huge amount of revenue from the taxes levied on fuel prices. These taxes contribute to the overall revenue receipts of the governments and form a major chunk of expenditure in the budget each year. In the ongoing FY up to December 2020, the central government has earned Rs. 2,40,000 crores and State governments have earned Rs. 1,40,000 crores from the taxes levied on fuel. A break up of the revenue generated by the Central and State governments is depicted below:

Clearly, both the governments have a high level of dependency over fuel for revenue generation. Other major factors contributing to the revenue receipts of the government are the GST levied on services and goods and income taxes paid by individuals, HUFs and organizations. The collections from income tax in FY 2020-21 is expected to be Rs 6,38,000 crore. In 2002-2003, 4.4% Indians paid income taxes and the number has dropped to 3.8% i.e. 3.3 crores. India has a population of 130 crores and such little revenue generation from Income taxes do India less good than harm. As per the PIB report, the fiscal deficit in BE 2021-2022 is estimated to be 6.8% of GDP. To maintain a healthy fiscal deficit and to protect the economy from crashing down, the government must maintain a balance between its revenue generation and expenditure Y-o-Y.

When questioned in one of the recent interviews, Madam Finance Minister Smt. Nirmala Sitharaman opined “To take it (fuel prices) under the ambit of GST is a call for GST council to take, whenever it deems fit”. The GST council seems reluctant to take up the matter in its hands since it has the participation of both the State and the Central Government and both parties are themselves hesitant to give up their share of revenue and bring in a transparent tax system i.e. GST over fuel. To match the revenue generated and to keep the fiscal deficit in check, it is expected that the government would have to levy GST of more than 100% which would be a suicidal task for any government to take up considering the transparent nature of GST system. It is instead a shame that though the tax levied on fuel is more than 69% today, the masses have little idea about it. Transparency of GST will sway the voters away from the ruling parties in the States and the Centre.

However, as per reports, if Petrol and Diesel are brought under GST, their prices will stand at prices somewhat illustrated as:

The prices however do not seem realistic and do not consider the concerns highlighted above. As always, there has been speculations around this topic as well. But, given the decisions taken by the governments in the past, the highlighted concerns seem more of a possibility rather than the above hopeful picture.

It is for the government and the GST council to decide a way forward for the good of all, for several voters are already in dismay and there is a prevailing environment of economic uncertainty owing to the recent decisions taken by the Central Government. The Central government must steer the sinking ship lest the day is not far when the deadly smoke will make its way back to the kitchen and we will have cars and developed roads, but no money for fuel.