Bringing fuel under GST: Govt on the horns of a dilemma

October 12, 2017   admin  Economy
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After the Central government reduced the excise duty on motor fuels, state governments matched the move by cutting the VAT imposed on motor fuels. Gujarat and Maharashtra have announced a reduction of 4 percent and Himachal Pradesh has announced a 1 percent cut. Meanwhile Uttarakhand has proposed a 2 percent cut in VAT and another 2 percent in cess. This move helps in easing the rising prices of retail fuel and has reignited the debate on uniform taxation on motor fuels and their inclusion under GST.

Even as a section of the Street argues that petroleum products (a key input for almost all industries) should be brought under the ambit of GST, we examine the feasibility of the same in the wake of the raging debate.

Background

International crude prices have been on the rise and countries like India with almost 70 percent dependence on crude imports are feeling the heat. With deregulated pricing, the entire burden of the hike is being passed on to the consumer, who have all the reason to feel aggrieved. Thanks to an increase in fuel taxes, they did not benefit when crude prices were sliding. Now that crude prices are rising, they are being forced to shell out more.

What is the furor about?

Even after excise and VAT cuts, prices for petrol and diesel at Rs 72 per litre and Rs 59 per litre, stand close to their three-year highs. Over these last three years global crude prices have halved from around USD 110 per barrel to USD 56 per barrel. This effectively means that Indian consumers are paying almost the same for petrol and diesel when crude was at USD 110/barrel.

Taxation conundrum and price buildup

Currently, two taxes, VAT and excise duty, are imposed on petrol and diesel. The VAT component varies across cities and the percentage is decided by individual state governments. Excise duty is imposed by the central government and is a fixed amount per litre across states. Nearly half the current price of petrol and diesel is attributable to taxes imposed by the Central and the state government. This means the cumulative rate of current taxes (VAT+excise) amounts to a whopping 71 percent on diesel and 99 percent on petrol which was around a mere 15 percent at the start of 2014.

Benefits of inclusion in GST?

Implementation of GST on petrol and diesel prices would bring about pricing parity across states and facilitate free movement across the country. Moreover, petroleum products are key inputs for many industries and since they are outside the ambit of GST, the user industries cannot claim input tax credit (ITC) on a key raw material. Inclusion in GST would enable companies to claim an input tax credit thereby reducing their overall tax burden. This would specially be beneficial for oil marketing companies.

Question of feasibility

At present, cumulative tax rate on petrol and diesel stands around 99 and 71 percent, which are much above the highest GST slab of 28 percent. This raises questions about feasibility of petrol and diesel under GST in the current fiscal.

A mere Rs 2 reduction in excise duty recently amounts to around Rs 26,000 crore reduced collections annually (around 10 percent of total collections from fuels). The cut would reduce the FY18 receipts by a whopping Rs 13,000 crore, which is approximately 0.8 percent of our total budgeted receipts for FY18 and around 2.4 percent of the year’s total estimated fiscal deficit.

A reduction in the VAT imposed by state governments will further add to a loss in revenue for states, although the degree of impact for states would be lower given that VAT is charged as percentage of total fuel price which have been rising sharply.

It is unlikely that the government would want to tinker with the recently implemented GST structure and introduce any slab higher than 28 percent. A straight forward implementation of GST at 28 percent on fuel would result in a deep hit on the government revenues.

Another possibility is to include fuel under a demerit category (or maybe introduce a new category name) and levy a cess to compensate for the loss of revenue (currently Delhi government charges 0.25 percent as pollution cess on diesel).

This, too, has its own set of problems. Currently, demerit goods attract a cess. Petrol and diesel, on the other hand, are basic needs for retail and commercial consumers. Given the huge difference between the maximum GST rates and current taxation rate on petrol and diesel, the government would require a cess of nearly 50-75 percent to make up for lost revenue. Without such a cess, the government will have to take a huge hit on its revenues which could impact infrastructure spending.

Although recent steps of excise and VAT reduction stand favorable for customers and cool down the heat around price hike for the time being, an altogether implementation of GST seems distant. Till such time the government manages to find an alternative source of revenue, it will continue to play ‘heads I win, tails you lose’ with the consumer.

Source: http://www.moneycontrol.com/news/business/economy/bringing-fuel-under-gst-govt-on-the-horns-of-a-dilemma-2410215.html

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