‘GSTfying’ petroleum

Soaring fuel prices have been the talk of the town lately and fairly so. Even a meagre increase in fuel price not only impacts the consumers directly in their day-to-day needs but also has an effect on inflation. As we mark the first anniversary of GST, it’s an opportune time to deliberate on the inclusion of petroleum products under GST.

Currently, petroleum products such as crude oil, natural gas, diesel, petrol, and aviation fuel are outside the ambit of GST and they are subject to the levy of Central excise and State specific VAT regulations.

The GST law does contain a provision for inclusion of petroleum products — petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel — under GST from such date as may be notified by the government on the recommendations of the Council. Since these products are still outside the GST net, there is a loss of input tax credits one pays towards excise and State VAT, as the same cannot be off-set towards output GST. Similarly, GST on inputs/capital goods and input services, becomes a cost for the petroleum industry.

Under the existing structure, the Centre levies a total of ₹19.48 per litre of Central excise duty on petrol and State Governments levy VAT at ad-valorem rate which ranges from 6 per cent to 40 per cent. Thus, the total tax incidence on petrol comes to around 35 to 50 per cent (may be more in certain States) of the total fuel price.

In the case of high speed diesel, the Centre levies a total of ₹15.33 per litre of Central excise duty on high speed diesel and State governments levy VAT at ad-valorem rate ranging from 6 per cent to 28 per cent. The total tax incidence on high speed diesel thus comes to around 30-40 per cent of the total fuel price. On the other hand, if petro products are brought under GST, then, even with the highest tax slab rate of 28 per cent, there would be considerable price reduction. This drop itself would bring in the first level of respite for the consumers and would also bring uniformity in the fuel taxes imposed across the country.

If one makes an indicative computation of fuel prices under GST (if the government brings petrol under 28 per cent GST), it will suggest that fuel prices could reduce in the range of at least 10-20 per cent due to savings in taxes, which would have a direct impact on disposable income of any household.

It will also allow seamless flow of input tax credit which will indirectly reduce prices of petroleum products as also other products where petroleum is a major input.

Revenue impact

However, bringing petroleum products under GST (even with the highest slab of 28 per cent) would significantly dent the government’s kitty as the revenue dependency on current tax levies is high. In order to compensate this gap, the government may also resort to introduction of additional cess on the petroleum products, which would mean that the ultimate price to the consumer may not see a substantial dip.

Recently, there has been reports of a combination of both, GST (with 28 per cent slab) and local sales tax or VAT (to be levied by the States). But this may not result in any substantial difference in pricing and may also give rise to further complications in taxing structure. While one needs to wait and watch for now, a stable and sustainable methodology of bringing in petroleum products under the GST ambit is the need of the hour.

Rohira is Partner, Grant Thornton India LLP and Jain is Director.

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