high petrol and diesel prices are hurting consumers and may soon lead to rise in inflation but there seems to be little possibility of a relief in the long or short run provided international crude prices cool off.
Against the popular narrative being built by several political parties, inclusion of petroleum in Goods and Services Tax (GST) may not happen soon.
Why? Simply because under the current rules any such move may actually lead to a further hike in fuel prices especially in states which are keeping prices suppressed by maintaining lower taxes. A short-term intervention by the government is ruled out as it may disturb the fiscal deficit situation.
GST Council sources say that subsuming fuels in GST is not as easy as it is being politically made out. Explaining why petroleum may not enter the GST list, an official said, “Currently, the effective sales tax by states ranges from 6 per cent to 40 per cent on petrol and 6 per cent to 29 per cent on diesel. While states like Maharashtra charge a high of 40 per cent, Andaman and Nicobar changes 6 per cent ad valorem. The Centre charges a fixed amount of Rs 19.48 on per litre of petrol and Rs 15.33 on diesel across the country”.
This means that each hike in crude price brings more revenue to the states. The official explained that the total levies put together are nearly 60 per cent. “If the central levy and dealers commission is added, the amount goes up to nearly 100 per cent over the real cost of fuel. Now, if petroleum is included in GST, then the Revenue Neutral Rate (RNR) could be as high as 100 per cent,” the official said.
The official said that such a high GST on fuel will not be acceptable and states may not agree to this arrangement. States like Maharashtra charge higher tax than Andaman and Nicobar currently. Once subsumed in GST, fuels will cost the same across the country. In many states with lower taxes, there will be a sharp rise in prices which will be politically suicidal.
WHY STATES MAY OPPOSE GST ON PETROL
- Many states have kept petrol prices under check by maintaining lower taxes.
- Inclusion of petrol under GST means its price will be uniform across country.
- In states with lower taxes on petrol, there will be a sharp rise in fuel price.
The Centre cannot intervene here. Facing high prices and public anger, the Centre in October had reduced the Basic Excise Duty on Petrol and diesel by Rs 2 a litre. Any more cut to provide relief will hurt the Centre’s collections and disturb its plans to maintain 3.2 per cent fiscal deficit.
While the Congress is publicly attacking the government for not including petroleum in GST, the UPA, when in power, had not included petroleum in the GST constitutional amendment. The Narendra Modi government included petroleum in its act but the implementation was kept in abeyance till a revenue neutral situation was arrived post-GST launch.
NO SHORT-TERM RELIEF LIKELY
Top sources in the Finance Ministry said that “the rising crude prices are driving the fuel prices through the ceiling. The government doesn’t have enough to step in and announce cuts in levies to soften the prices of fuels”.
Diesel prices are at an all-time high. In Delhi, diesel prices are hovering at Rs 63 per litre while in Mumbai it costs more than Rs 67 per litre.
The government is aware that spiralling diesel prices will lead to a further spike in inflation as high transport cost for vegetables and essential commodities will push their prices up.
Petrol price in Mumbai has crossed Rs 80 per litre mark while in Delhi it is Rs 72.38 per litre. Among other metros, petrol costs Rs 75.08 per litre and Rs 75.06 per litre in Chennai.
Sources say that any intervention at this juncture on fuel prices will get billed to the Centre as most states are battling revenue deficit since launch of the GST and are not ready to reduce their state levies on fuel.
The Centre, on the other hand, is not in a mood to intervene and let the cost of any such move increase its fiscal deficit burden. The other option of state-owned petroleum companies taking a hit to cushion the consumer is also being ruled out at this moment.
The administered price mechanism on fuels was dismantled largely to let oil companies, mostly state owned, ensure that rising crude prices don’t upset their economics and expansion.
The economic compulsions are so tight right now that the government it seems would have little option but to grin and bear the political resentment over high fuel prices.