Should petrol and alcohol be left out of GST? Yes

Ideally, the base for GST should be comprehensive. Most experts have argued that petroleum products and alcohol should not be excluded from GST at the stage of constitutional amendment. Impeccable logic — nothing to beat it. However, in the short run, this may not be possible for specific reasons.

The States do not seem willing to budge. The concerns of the States can be summarised as follows: The change-over to GST regime would mean two things: First, a well established source of revenue – CST (central sales tax), would be replaced by a base which the States tax administrations do not yet understand well, that is, services. This introduces a degree of uncertainty in the revenues of the States, which can be a genuine cause for concern. Here, while the Government has agreed to compensate the States for any loss of revenue, there appears to be some trust deficit, especially stemming from the CST compensation not being disbursed, although it was budgeted for.

Second, the States perceive some loss of autonomy, since the design of the tax as well as the rates of tax would afford very little scope for variation across states within the GST regime — the potential “narrow” band for the standard rate would limit states’ autonomy in fixing tax rates.

Given the context of the disagreement on treatment of petroleum products and alcohol, what can be done with the proposed GST reforms? Here, we need answers to two related questions – one, isn’t GST without these products within its ambit an improvement over the present system? And two, is GST reform expected to be a one-step reform or a continuous process?

Since petroleum products as well as alcohol would face non-rebatable excise levies in addition to GST, even if they are brought into the ambit of GST, the liability of tax is not expected to be lower on these sectors.

Clearly, there would be cascading even then, albeit to a reduced extent. GST even without these commodities would mean an improvement over the present regime --- one of the steps in reform of domestic trade taxes in India, not the final step.

If we are reconciled to idea of a process of reforms, then at this juncture it seems important to break the gridlock and implement GST in some form, with the confidence and trust that the reforms process would continue, and with a roadmap for the subsequent steps.

Otherwise, waiting for GST appears perilously close to “Waiting for Godot”, a disturbing comment on the tax policy reforms in India.

Read also: Should petrol and alcohol be left out of GST? No

(The author is Professor, National Institute of Public Finance and Policy).

COMMENT NOW