At the time of writing, petrol was retailing at Rs.82.48/litre in Mumbai, roughly 62% more than the Rs.50.8/litre Pakistanis shell out for a tank of gas. This is despite the fact that crude oil prices are now way lower than the $100 per barrel rate around which it was hovering in 2014.
Extraneous factors like the production cuts enforced by the Organization of the Petroleum Exporting Countries (OPEC), and supply disruption owing to turmoil in West Asia have influenced the spike in fuel prices in India, but tax levies still constitute the biggest chunk of the retail price.
The Minister for Petroleum and Natural Gas Dharmendra Pradhan made the case for brining petroleum products under the ambit of the Goods and Service Tax (GST) last month. In principle, a single tax rate for POL (Petroleum Oil Lubricant) products will be a far cry from the Byzantine tax structure in place today, wherein different commodities under the POL umbrella are taxed differently across the country.
The spoils from the overall tax incidence on POL products are shared between the Centre and States, and the revenue from the Value Added Tax (VAT) collected by the States is often critical to balancing their budgets.
Thus, while bringing petrol and diesel under the GST regime with a lower tax rate might give a temporary reprieve to customers, the impact on the health of State treasuries can be negative.
At present, petrol, diesel, aviation turbine fuel (ATF), natural gas, and crude oil are outside the ambit of the GST, while liquefied petroleum gas (LPG), kerosene, and naphtha come under it. The GST rate chart for petroleum products has pegged naphtha, kerosene and LPG at the 18% slab. However, kerosene sold through the public distributions system (PDS) network, and LPG for domestic consumption attract only 5% tax.
What is the existing tax structure?
The retail selling price (RSP) for petrol and diesel were Rs.73.95/litre and Rs.64.82/litre respectively in New Delhi on April 4, 2018. The total tax incidence can be broken up into two components, the excise duty collected by the Centre and VAT by the States. The retail price is a sum of excise, VAT, the price to dealers, and the commission pocketed by dealers.
The price at which petrol and diesel were sold to dealers in New Delhi on April 4, 2018 was Rs.35.15 and Rs.37.42 respectively. The total tax on petrol, which can be calculated by adding both State and Central taxes, amounted to Rs.35.2/litre, which is marginally over 100%. Likewise, diesel is taxed at 66.48%.
Then and now
In FY2014, rising demand fuelled by robust global growth caused the escalation of crude prices to $107/barrel.
Dealers in India had to pay Rs.52.68/litre for diesel in FY2014, as opposed to Rs.37.42/litre in April 2018, which is in keeping with the global trend. However, the retail price of diesel today is Rs.65.93, almost Rs.10 more than FY2014 prices.
File photo: Activists of the BJP demonstrating against the price hike of petrol and diesel, in New Delhi on February 15, 2008.
In spite of the cost price being almost a cheaper by a third, there has not been a commensurate decline in retail price as tax rates have been progressively hiked. In addition to this, the subsidy of Rs.8.37/litre that was extended to consumers was withdrawn.
So, who gains?
Both the Centre and States earn substantial revenue from taxing petroleum products. Since it is out of the GST, variable taxes are levied by States, often compounded by other cesses, adding to the retail price of fuel, and correspondingly to the States' coffers. This variable tax structure is responsible for fuel prices varying across different parts of the country.
Since the inflationary impact of a significant hike in fuel prices can be felt in other commodities like food, energy, and chemicals, governments also subsidise fuel products. However, the net revenue from taxing petroleum products is overwhelming positive.
According to Petroleum Planning and Analysis Cell (PPAC) data, the total tax collection from POL products was Rs.4.63 lakh crore in FY2017. Of this, the share of States' tax revenue was Rs.1.90 lakh crore, which amounts to 41%. The Centre pocketed Rs.2.73 lakh crore in FY2017.
On the other hand, the money spend on subsidies was Rs.60,269 crore in FY2015. This includes the subsidy for petrol and diesel. The latter was de-regulated on October 18, 2014. In FY2017, the total outflow from the government's kitty towards subsidising fuel was Rs.27,539 crore, only 5.94% of the tax revenue for that fiscal. Budgetary estimates released by the Ministry of Finance peg the subsidy for FY2018 at Rs.24,460.
Tax rate under GST
Since the inception of the GST, the inclusion of petrol and diesel in the basket of energy goods has been hotly debated. At present, there are four slabs – 5%, 12%, 18% and 28% tax rates. Bringing petrol and diesel under the GST would therefore mean that both the Centre and States will have to forego a large chunk of their revenues, which in turn could upset budget calculations. The present tax rate for petrol and diesel are 100% and 66% respectively.
If the GST rate for petrol was set at 90%, with the Centre and States sharing 45% each of the tax income, they would each pocket Rs.15.82 from a single litre of the fuel, and the retail selling price would go down by 4.8% to Rs.70.39. Likewise, if the rate is set at 80%, prices would drop by 9.6%.
If petrol and diesel were both accommodated in the 28% tax slab – the highest existing tax slab under GST – they would cost Rs.48.592/litre and Rs.50.41/litre respectively. Correspondingly, the drop in retail price would be 34.29% and 22.23% for petrol and diesel.
How will States be impacted?
While consumers will be glad to see their fuel bills slashed by the advent of a favourable rate structure under the GST, State governments will be the most affected. Take the example of Kerala.
The present tax regime in the State levies 32.8% on the dealer price (Rs.35.15/litre), along with additional sales tax of Rs.1/litre and a 1% cess, which effectively amounts to 34.06%, or Rs.11.97/litre. If instead, 28% GST were applied, with 14% SGST, Kerala (and all States) would earn only Rs.4.921/litre. This would cause a loss of Rs.7.049/litre (-59%) in the case of Kerala.
According to Kerala's Finance Ministry website, in 2016-17, the total VAT/Sales Tax collection from the petroleum sector was Rs.6,899 crore, and the fiscal deficit of the State was 3.5% of its GDP. If 28% GST were to be implemented with equal revenue sharing between the Centre and States, Kerala's fiscal deficit would increase by Rs.4,062 billion to 4.4% of GSDP.
Delhi stands to lose least, with its fiscal deficit increasing only marginally from 0.5% to 0.74%. Rajasthan will be one of the biggest losers, with its fiscal deficit ballooning to 6.48% of GSDP. Maharashtra, which is the State with the highest revenue from tax on petroleum products, at Rs.23,160 crore, will see its fiscal deficit widen – only slightly - from 2.2% to 2.78%. The impact of a lower GST on petroleum products will be felt more by lesser developed States which derive a large portion of their revenues from excise and VAT on products like fuel and alcohol.
The GST, which was conceived as a single unifying tax structure for the entire nation has already betrayed its objective by fragmenting the basket of goods traded in the market, into four silos. If petrol and diesel are added to the 28% tax slab, the revenue loss to the exchequer will be too great to ignore. However, if new rate slabs are created for petrol and diesel, it would amount to distorting the vision of 'One Nation, One Tax,' which forms the bedrock of the GST.
