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In September, when rising petrol and diesel prices drew howls of protests from consumers, a defensive oil minister Dharmendra Pradhan made a pitch to include petroleum products under GST. Now, finance minister Arun Jaitley has added his voice to the thought. The Centre favours bringing petroleum products under GST, the FM says, but only after a consensus emerges among States. Currently, five key petroleum products — crude oil, petrol, diesel, natural gas and aviation turbine fuel — are not covered under GST. Among other complications, this has resulted in stranded input tax credit and higher costs for oil companies, arising from the old and new tax regimes not talking to each other.
How likely is a consensus on this thorny issue? It will be a tough task as it would require the States and also the Centre letting go of their milch cows. Petroleum and oil products contribute significantly to the governments’ tax kitty. Excise collections on these products collected by the Centre jumped from about ₹99,000 crore in 2014-15 to about ₹2,43,000 crore in 2016-17. The value added tax (VAT) collected by States and Union Territories jumped from ₹1,37,000 crore in 2014-15 to ₹1,66,000 crore in 2016-17. Multiple hikes in excise duty on petrol and diesel over the past few years have sharply increased the Centre’s dependence on these products. Also, petroleum products are said to account for about 40 per cent of States’ revenue. A good share of the excise duties also goes to States. Under the current regime, the effective tax rate on petrol and diesel is even 100 per cent or more. In comparison, the maximum rate (including cess) under GST is a far lower 45 per cent. Input tax credits under GST will bring down the effective rate further.
It’s unlikely that the FM and States will agree to this huge loss in revenue. Unless, of course, they are adequately compensated. Reports suggest a dual structure being thought about as a workaround — excise and VAT being allowed to continue even after GST is imposed on petrol and diesel. Now, this solution, while it runs the risk of being messy, could be a step forward towards an eventual transition into GST. To begin with, it will at least allow oil companies the benefit of input tax credit. And eventually mean lower prices for consumers. It’s worth a shot.
Senior Assistant Editor
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