Facing criticism after auto fuel prices in India hit a three-year high last month, oil minister Dharmendra Pradhan pitched the idea of including petrol and diesel under the Goods and Services Tax.
Transport fuels are outside the nationwide levy. States charge a value-added tax on them and the central government levies an excise duty.
Together, the two earned about Rs 2.7 lakh crore from taxes on petroleum products in the year to March, according to data by Indiastat.com and a budget document. The share of the states was higher at Rs 1.66 lakh crore. It contributed about 7.3 percent of their total revenue in the last financial year, according to a Reserve Bank of India report on state finances.
That leads to the question how the centre and states will share the revenue.
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Here’s where things stand now: the highest rate under GST is 28 percent, with the states and the centre equally sharing the taxes. Demerit goods like tobacco and cars attract a cess.
Since states earn a higher share of fuel taxes, an equal division would mean that they will have to be compensated for the revenue loss.
That can be worked out. GST has a provision to increase the tax rate to 40 percent. And it’s not mandatory to equally divide the revenue between the central and state governments, said Pratik Jain, leader-indirect tax at PwC.
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One way could be to levy GST over and above an excise duty at a reduced rate, he said. That brings in the question of input tax credits. More on that later.
The government will have to calculate taxes and the total volume of products consumed, which would give the effective rate of tax on the items, said Abhishek Jain, indirect tax partner at EY India. If the total levy on petroleum products in the existing structure does not fit into any GST slab, the government may have to introduce a new rate like in case of gold, he said.
If it goes ahead to levy GST on fuels, that will allow companies consuming fuel—say airlines—to claim input tax credit. The new tax regime grants manufacturers and suppliers credits on taxes paid that can be set off against a future liability.
GST Council can also consider a staggered approach, starting by including products like natural gas and ATF, Jain of PwC said.
NR Bhanumurthy, a professor at National Institute of Public Finance and Policy, advised a cautious approach. “The government should wait and analyse the trend of GST collections before deciding on any such change.”
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