If a decision is taken to put a rate for petroleum products under the Goods & Services Tax (GST), it will require reassessment of State compensations, experts said.

Finance Minister Arun Jaitley, during debate on GST Bills in the Lok Sabha on Wednesday, said that the Constitution provides that these petroleum products would attract GST, though the rate has been kept at zero. Going forward, it would require only an executive decision on setting a rate on petroleum products.

Analysts who spoke to BusinessLine note that the tax administration on petrol and diesel under the GST will continue to be shared by the Centre and State for a while. In the long-term however, the GST roll out on fuel is essential since the Centre aims to bring the product under a single tax slab across the country.

The Centre has assessed the total compensation to States for GST roll out, sans petroleum products, at around ₹50,000 crore. With the addition of petrol and diesel to this, the component will be pushed upwards.

According to Petroleum Policy and Analysis Cell, the contribution of Sales Tax and VAT on petroleum, oil and lubricants for fiscal 2015-2016 stands at ₹1,42,848 crore.

The total tax on petrol and diesel stands upwards of 40 per cent. Barring a few States, this revenue is almost equally divided between the Centre and the State.

‘Sin Products’

The States will be reimbursed by the Centre for any revenue loss after GST roll out. This compensation kitty will be met from a higher tax incidence on ‘Sin Products’ such as alcohol and tobacco.

Commenting on this, Partner, Indirect Tax at KPMG India, Harpreet Singh, said, “Today each State has a different tax incidence on petrol and diesel. GST will enable a uniform incidence across the country. The compensation that the Centre will have to make is so huge that it cannot come from the existing Sin Products alone. We can expect more products to be pushed to the higher tax slabs to compensate for the revenue loss.”

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