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  • Petroleum Products under GST – How feasible?

    Published on May 17, 2018

    by Radhika vijayalaksmi

    “Make the hay while the sun shines “ –this is exactly what the Govt was practising with regard to petroleum products taxation.  The farsighted and clever finance ministry was quick to tap on the reduction in crude oil prices in international market , increased taxes, there by considerably reducing the fiscal balance, keeping a close watch and check on the inflation. And all this made perfect economic sense!  This too attracted both praise and criticism, just like the other two Modinomics moves  – the note ban and GST,  with its trade mark characteristic of putting long term interests of country before populistic politics.

    With ‘One Nation One Tax’ as the tag line GST is expected to bring  in a number of benefits like uniformity, reduced taxes on essentials to customers , ease of operations for traders ( after the initial hiccups of course), increase in tax base. There is also the not so obvious intent of curbing the black money as now there is ability to  checks at both end of supply chain and also cross check on other financial activities of establishments and individual involved.  But without including power, land and petroleum products also under GST the expected harmonisation will not materialise.

    The tax revenue for India is around 16.5% of GDP, far below the Emerging Markets average of 21%  and OECD average of 34%.  Therefore we can not say that the government is being insensitive and is ‘pocketing’ their hard earned money. Tax revenue is from petroleum products is 2.87 lakh crore in 2015-16, compared to 80,000 crores in 2014-15. This is in fact  almost 40% of Indirect tax collected.  It’s a no brainer that getting this under GST regime even if within the highest category of 28%tax, will leave a big hole in center’s coffers unless other revenue generating mechanisms are identified and implemented effectively. The state govts will also demand a compensation for the loss of revenue they will incur, that too needs to be taken care.  Though centre and states in principle agree that attaining all the intended  benefits of GST  is possible only by increasing the domain of what all comes under GST, they are stuck at this question of from where else to surce for developmental activities.

    One option would be to bring petroleum products under the highest tax slab of 28% in which case the petrol prices will be approx. 44 a litre and Diesel approx. 40 a litre, and then levy additional cess to compensate the losses. The common man doesn’t get much benefit this way, but rest of what GST aims for can be achieved to a great extent. But, this cannot be the long term solution. With the heavy dependency on revenue from petroleum products as and when the crude oil prices increases, Govt. will have to increases the cess or change GST structure to have a higher tax slab – clearly not in line with the moto of sab ka sath , sab ka vikas.

    The long term solution should be identifying new areas of revenue generation along with identifying areas of inefficiencies in the system. It’s about time that we devise mechanisms to slowly move away from the culture of subsidies and tax exemptions. The revenue forgone because of various exemptions is more than 2 lakh crores in the last financial year. This gives an idea about the stress exemptions and subsidies are causing to the system.

    Though with Demo the tax base has seen considerable increase, it is far from 100% inclusion. This needs to be tackled with continuous checks and strong action against evaders in place.

    Govt. seems to be going strong with its divestment plans. Identifying poor performers that eat up Govts funds, proper valuation of the same and selling to private/strategic buyers should continue.

    But, are we there yet – could we straight jump to the decision of cutting on petroleum taxes hoping for rest everything to be in place soon = too high a bet.  Aggressively push for digital transactions, make our systems effective and above all come up with the right set of policies that suits the Indian conditions and implement with all our might has to be the way forward – sooner the better!