Petrol and diesel are two of the most highly taxed goods in the country and bring in huge revenues to both the Centre and the State governments
The story so far: The Goods and Services Tax (GST) Council last week decided to not bring petrol and diesel under the ambit of the GST. The proposal to bring domestic fuels under the GST was taken up by the Council after an order by the Kerala High Court but members of the Council refused to accept it.
Why is there a demand to bring petrol and diesel under the GST?
The rising cost of petrol and diesel has increased pressure on the government to reduce taxes on fuel prices in order to rein in their prices. The price of petrol has risen above the 100 rupee mark in major cities across the country. The government has blamed rising international crude oil prices for the rise in domestic fuel prices. India imports more than 80% of its oil supplies and the price of crude oil in the international market does have a significant impact on domestic fuel prices.
However, the high taxes are also seen as a major reason behind the rise in fuel prices. It should be noted that more than half of the money paid by the end consumer to purchase fuels goes towards paying taxes. Even when international crude oil prices drop, the government does not let domestic fuel prices to drop. Instead, it increases taxes to capture the windfall gains that could accrue to oil companies. For instance, even though international crude oil prices dropped to around $20 per barrel in April last year due to the huge drop in demand during the global lockdown, the retail price of petrol and diesel continued to stay high. The government says it increased taxes on domestic fuels to compensate for the loss of other revenues. The opposition parties have demanded that the government slash taxes to make fuels more affordable.
Why is the government reluctant to bring petrol and diesel under the GST?
Petrol and diesel are two of the most highly taxed goods in the country and bring in huge revenues to both the Centre and the State governments. Fuel taxes are projected to contribute over 6 lakh crore to the Central and state exchequers combined in 2020-21 and bringing domestic fuels under the GST would effectively mean bringing down the taxes on them. The highest tax slab under the GST is 28% and fuels such as petrol and diesel are taxed at over 100% currently. So both the Centre and the states are reluctant to lower taxes. States, in particular, believe that bringing petrol and diesel under the GST would make them further dependent on the Centre to receive their share of the taxes. At the moment, states can independently impose a value added tax on petrol and diesel. The Centre and the states have also justified their decision to tax fuels heavily by saying that the revenue collected helps them fund social programmes. Critics of the government’s policy of imposing high fuel taxes, however, argue that high taxes are a drag on the economy. If taxes are reduced, more petrol and diesel could be supplied and this would boost economic growth. If the boost to economic growth is greater than the reduction in the tax rates, the government might actually collect more revenue than under the current high fuel tax regime.
What lies ahead?
Since the revenues of both the Centre and the states will be heavily affected by a lower tax on petrol and diesel, it is unlikely that these fuels will be brought under the GST anytime soon. Even if these fuels are brought under the GST regime, there is likely to be a steep GST rate imposed on them to prevent any loss in tax revenues. So the real question is not whether the Centre and the states are willing to bring fuels under the GST but whether they truly wish to bring down taxes on fuels. It should be noted that the share of the final price of petrol that goes towards taxes has increased from around 30% in 2014 to around 55% now. So no further rise in fuel taxes may be the best that consumers can hope for.
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