The likelihood of revenue loss and the convenient way of tax administration on petrol and diesel are the major concerns of States, including Tamil Nadu, in resisting the move to bring in petroleum products under the ambit of the Goods and Services Tax (GST), according to experts.
Even though the GST Council, at its meeting last week, decided not to pursue the matter, the pros and cons of the move have again become a subject of discussion. As far as Tamil Nadu is concerned, the revenue from levying Value Added Tax on the two petroleum products has been in the range of 12.5% to 16% of the State’s own tax revenue (SOTR) or around 1% of the Gross State Domestic Product (GSDP) in the last 15 years. In absolute figures, the revenue was a little over ₹3,700 crore in 2007-08; it rose to ₹17,905 crore in 2019-20 and stood at ₹16,713 crore in 2020-21, which was the first year of the pandemic.
It is evident that under the present highest rate of 28%, States will not be able to net as much revenue as they have been getting under the current arrangement. If the introduction of GST for petroleum products is to be made revenue neutral, there has to be a State-specific additional levy, given the fact that the existing tax rate varies from State to State, said Sacchidananda Mukherjee, associate professor at the National Institute of Public Finance and Policy. Besides, there will be a significant impact on the inflationary trend, he said, adding that in such an eventuality, the end consumer would not benefit in terms of price reduction.
As for tax administration, veteran policy makers say the present system of VAT on petroleum products is easy to administer, as there is no multi-stage taxation. If petrol and diesel are brought under GST, a destination-based tax, the situation may turn out to be more advantageous to businesses that can claim themselves of the input tax credit, than retail consumers.
There seems to be another way of getting States’ consent for the GST, if the Centre comes forward to withdraw the levy of cess and surcharge on petrol and diesel. A few days ago, Finance Minister Palanivel Thiaga Rajan went on record, saying that the State government would reconsider its decision if the Central government took such an initiative. This assumes relevance in the light of the component and cess and surcharge on petrol and diesel having become higher than the component of the Central excise duty, as found out in a study by the petroleum planning and analysis cell of PRS Legislative Research, a New Delhi-based think tank, in December 2020. The study revealed that the Central tax component (excise duty) on petrol and diesel a litre went down from ₹9.48 and ₹11.33 in April 2017 to ₹2.98 and ₹4.83 in May 2020, whereas the component of cess and surcharge went up from ₹12 and ₹6 to ₹30 and ₹27 during the corresponding period.
A policy maker, who had a stint with the Centre, said it was not just the States, but also the Central government, that would lose revenue, if GST is introduced without revenue-neutral arrangements. Dr. Mukherjee said until the country’s economy recovered and the GST system stabilised, there was no need for bringing the petroleum products under the net.
