Linking cess with govt borrowing is unfair

Madan Sabnavis | Updated on October 03, 2021

Oil slick Bringing petro products under GST will help consumers but governments may lose tax revenue   -  Manjunath HS

The GST Council’s inaction on petro products and cess continuing till 2026 are likely to make life difficult for consumers

The outcome of the GST Council meeting on September 17 is likely to divide opinion. The lowering of rates on several products and services especially in the pharma area is welcome at a time when health inflation is high and has affected almost every household as expenses on healthcare has increased during these pandemic times. However, two areas would come as a disappointment for sure.

There were expectations that the energy products would be brought under GST or at least a roadmap announced to ensure that at some point of time this would be a reality. Petro products are widely used by everyone either directly by operating vehicles or indirectly through the price impact on all products. Currently all taxes levied by both the Centre and States form two-thirds of the final price paid by the consumer. Even if a GST rate has to be considered, it would be abnormally high at 200 per cent presently which does not hold for any product. It is hence hard to choose a rate for these products as it is extremely high for something which is an essential good for the public.

Fiscal compulsions

The conundrum for the government is that these taxes have a direct impact on the fiscal balances. A sum of ₹6.35 lakh crore was earned by the Centre and States on these products in FY21 as revenue compared with ₹5.07 lakh crore in FY20. Quite clearly as consumption had fallen due to the lockdown, and global price of crude had also come down due to the recession, the government had fully exploited this situation by raising taxes in the form of excise duty (Centre) and VAT (States).

Excise and VAT accounted for ₹3.71 lakh crore and ₹2.03 lakh crore respectively in FY21, while customs, cess, royalty, IGST and minor amounts for CGST and SGST accounted for the rest of the collections. Unless the governments (Centre and States) are willing to reduce their levies, it will not be possible to bring petro products under the fold.

There is ideology at play here as well the government would like to retain the prerogative to increase taxes when it wants to. This holds especially when the base price of crude oil comes down. Crude oil has tended to vary between $40-70 in the last decade with wide aberrations on both sides, though generally in the upward direction. When this base price comes down, if the products are bound by GST rates, then the government would lose a lot of revenue which is likely to hit it hard. The Centre levies a fixed excise duty while States impose a VAT.

Last year, for example prices crashed to an all-time low in April with futures prices going negative and consumption plummeted thanks to the Covid lockdown. In such a situation increasing rates made sense to protect revenue. The Centre increased the specific duty while States automatically benefited as VAT is ad valorem. Some of them increased their VAT rates.

However, this year with crude oil price going back to the range of $70 plus, and taxes unchanged, prices of petrol and diesel soared above ₹100/litre and inflation becoming intransigent. The price of LPG too has been pushed up independently by the government by as much as ₹190 a cylinder since January 2021.

There are two solutions. First is that the GST can be made conditional on the crude oil price range and hence can be graded. There can be a series of rates to begin with depending on the range of crude oil price. The other option is for the government to voluntarily create a buffer above a threshold after which the revenue generated will be used for the rainy day when rates will not be increased. It cannot be ‘heads I win and tails you lose’ — where ‘you’ is the consumer.

The cess factor

The GST Council’s decision to retain compensation cess up to 2026 is also likely to disappoint consumers.

In FY22 it is estimated at ₹1 lakh crore which was also broadly the expected collections in FY21. When GST was launched in 2017, the cess, was to have been for five years, to be used to compensate States for any shortfall in revenue for this period if revenue did not grow by 14 per cent per annum.

This five-year period was to end in March 2022 after which the cess should be withdrawn. However, the Finance Minister has stated that the cess collections had fallen short as did overall GST revenue last year as well as probably in FY22 due to the lockdowns. The Centre had to borrow money to pay the States their dues. Now to repay this additional borrowing along with interest, the government plans to keep the cess running, which will over the next four years, help to make this payment.

Is this the right thing to do? This is a very ingenious way that the government has chosen because it sets a precedent that a cess can be levied or carried on to finance additional borrowing. In effect, the higher government borrowing programme is being financed through a cess, which may seem unfair to the public. The two should be separated, as taxes can be levied in future to service debt. Indian fiscal history shows that whenever a cess is levied (which need not be shared with States), they tend to become permanent.

This cess is imposed on vehicles, tobacco, alcohol, energy products including diesel and petrol, aerated water and coal. The implication is that these products will face a price disadvantage for four more years.

This is not good news for the auto industry in particular which has been buffeted twice by the lockdowns.

Therefore the GST Council’s inaction on these two issues is not good news for the consumer as inflation will continue to be high as the government is not willing to relent. The continuation of the cess can be a dangerous precedent used in future if it gets linked with government borrowing.

The writer is Chief Economist, CARE Ratings. Views expressed are personal

Published on October 03, 2021

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