New Delhi: Fuel being an inherent raw material is consumed across the sectors, whether goods or services. Exclusion of fuel from the GST results has always been in discussion as it results in huge blockage of tax credits on account of excise duties, VAT and other cesses levied on them which is eventually loaded to the price of the final goods or services making them dearer. High cost of daily essentials results in fiscal drag of the economy thereby reducing the purchasing power of the consumer.
Inclusion of these products can pave way for free-flowing credits in the supply chain thereby reducing the price of final products and also the burden of taxes borne by the ultimate consumer. Further inclusion of these products under GST can lead to reduction in taxes applicable on them thereby increasing the government revenue from increased consumption of these goods.
One of the key reasons for keeping petrol, diesel and other petroleum products outside the ambit of GST is that taxes charged on these products constitute a direct and major source of revenue for the States. Even Centre earns huge revenue from these products which is not shared with the States. By bringing them under GST, States don’t want to lose their liberty of earning this revenue independently by increasing their dependency on Centre for their share of revenue.
Another reason stated by the experts is that highest rate of tax notified under GST is capped at 28 per cent whereas today Centre and State collectively earn more than 100 per cent of taxes on these products. However, a crucial point that is missing attention in this entire debate is that lower taxes will ultimately lead to increase in consumption which will eventually increase the Government revenue and hence boost economic growth.
Inclusion of petrol, diesel and other petroleum products under GST has always been a controversial issue ever since introduction of GST. Being a direct and major source of revenue for them, States vehemently oppose the inclusion of these products under GST.
To an extent Centre also appears to be reluctant in bringing in these products under GST as taxes and cesses charged by them are not shared with the states. With inclusion of these products under GST, both Centre and State fear loss of substantial revenue by them.
On the issue of price hike of these products due to high taxes, States desires Centre to reduce cesses which is wholly earned by them and not shared with States whereas Centre alleges that States don’t spend anything for processing the fuels unlike Centre and hence should reduce their share of taxes.
The longing of both Centre and State to earn revenue from these products alongside increase in international prices of oil is only causing an obnoxious price hike of these products ultimately burdening the end consumer. A substantial part of consumer’s income is being spent on payment of these taxes which is detrimental for the growth of an economy.
Lately, while Centre has reduced excise duties on petrol and diesel, most states/union territories except 11 have also reduced VAT on these products. However, this is just a stop gap arrangement as the power to alter the taxes on these products still remain with States. Differential tax relief given by each States will only bring in geographical disparity over the price of these products which is further going to result in loss of overall revenue to the states charging higher taxes.
(The Writer of This Article is Geetika Shrivastava, Executive Partner, Tattvam Advisors.)
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