The Government’s recent proposal to include petroleum products and liquor under the purview of Goods and Services Tax (GST) is a welcome move towards the rationalisation of the GST regime.

The inclusion has been a matter of long-drawn debate between the Centre, States and industry. States feared a loss of autonomy in taxing these products and an erosion of revenue base under the GST’s standardised rate model. However, industry has favoured the inclusion of all sectors and products, with limited exceptions and exemptions.

The existing regime of taxing petroleum products and liquor is shared between the Centre and States, and the absence of standardisation has produced a cumbersome and complex net of taxes. Further, it has accentuated the cascading effect of taxes on petroleum products and liquor, due to the restricted utilisation of input tax credits on the various goods and services consumed during exploration and production.

Considering the size and importance of the petroleum sector, the proposal to subsume its products under GST is a positive one as it allows the industry to utilise the input tax credits on the goods and services consumed in the supply chain (from exploration and production to distribution and marketing). Thus, it mitigates the cascading effect of taxes. Further, the Centre and States can converge on the standardisation of tax policies, which could, to a large extent, simplify the associated regulations, processes, and compliances.

The liquor industry has been a substantial contributor to the State exchequer, with many States relying heavily on it. The sector is currently plagued by issues similar to those in the petroleum sector — namely, the cascading effect of taxes and the multiple regulations in tax administration. The inclusion under GST could impact State revenues positively, as liquor would likely be taxed at a higher GST rate and the States authorised to compensate revenue shortfall through an additional levy. Further, it would mitigate/ simplify the tax and regulatory issues associated with the production, storage, and distribution of liquor by related sectors such as hotels and restaurants, and departmental/ other stores.

In a scenario where the input goods and services for the petroleum and liquor industries are covered under GST and the outputs are not, there could arise complex issues surrounding double taxation, ineligibility for input tax credits, supply chain regulations, and so on.

However, the proposal to include the petroleum and liquor sectors under GST is a right one, and it would be prudent on the part of States to concur in the larger interest of the country.

(The author is Tax Partner, EY)

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