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Petrol, Diesel under GST: In politics vs economics, the govt is walking a tight rope

Bringing petroleum products under GST may lead to petrol and diesel prices falling by as much as Rs 31 in Delhi.

Written by: Parimal Peeyush, New Delhi [ Updated: September 27, 2017 15:54 IST ]
File photo of Prime Minister Narendra Modi with Finance
File photo of Prime Minister Narendra Modi with Finance Minister Arun Jaitley

Rising prices of petrol and diesel, which shot to prominence a few weeks ago, have come as a rude shock for consumers. With the daily price revisions taking away much of the impact with minimal surges, matters came to a pass when petrol and diesel prices returned to the levels of 2014, just before the Narendra Modi government had shot to power with a thumping majority. Notably, much of the promises of the current government centered around the pain of the common man, including the spike in petrol and diesel prices seen under the erstwhile UPA rule.

Today, as we find ourselves shelling out the same amount of money, despite the price of crude oil dropping to as much as half of where it stood before the current government assumed charge, one is compelled to wonder what factors led to this upswing. While observers have pointed out to the taxes levied by the central and state governments making up for most of this price pain, the fact that the government has refrained from bringing petroleum products under the ambit of the ‘all-encompassing’ Goods and Services Tax so far makes the case even more peculiar.

With retail oil prices hitting a three-year high, the government did admit that bringing petroleum products under the GST ambit was perhaps the only solution to deal with the problem. While Oil Minister Dharmendra Pradhan was quick to blame the shutdown in US refineries due to hurricane Irma which made global crude oil prices rise behind the spike, he did say that the Petroleum ministry has requested the Ministry of Finance to bring petroleum products under GST in a bid to reign in the Value Added Tax (VAT) charged by various states.

Still, the Finance Ministry led by Arun Jaitley has chosen not to respond, so far. Is it because the case for bringing petroleum products under GST flawed? Perhaps not, given that ahead of the GST launch, the FM had said that the Centre was all for inclusion of petroleum products under the new taxation system and sooner or later the GST Council would have to take a decision on it.

Deciphering the likely reason behind the government’s contradiction with its own stated intent requires an understanding of the impact that the decision, if taken, will have on petrol and diesel prices, the consumers as well as the government coffers.

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Impact on Consumers

As on September 27, the cost a consumer has to bear for a litre of petrol in Delhi is Rs 70.41 and for diesel, Rs 58.68. We have discussed earlier how the excise levied by the Centre, and VAT, by the state government, account for almost 50 per cent of the price burden on consumers. And that should come as no surprise since the central excise duty has gone up from Rs 9.48 in 2014 to Rs 21.48 today.

After coming to power in May 2014 – when the cost of international crude was hovering at around $100 per barrel -- the Narendra Modi government effected a series of increases in excise duties, 12 to be precise, to contain fiscal deficit. As per official data, excise duty on petrol has increased by 54 per cent since November 2014, VAT has seen an average increase of 46 per cent on petrol and dealer's commission has gone up by as much as 73 per cent. The case is similar for diesel where excise duty has gone up by 154 per cent, VAT by 48 per cent and dealer's commission by 73 per cent.

If these taxes were subsumed by the GST, an idea that the tax reform propagates, the impact on the consumer will be phenomenal. Considering that the government chooses to place petroleum products in the 28 per cent tax bracket under the GST, the impact on price for the consumer will be significant.

As per data given out by Indian Oil on September 27, a dealer in the capital city paid Rs 30.39 for a litre of petrol. On top of this, the Centre charged Rs 21.48 per litre as excise duty and the state government charged 27 per cent as VAT which amounted to Rs 14.97. Moreover, the dealers charged a commission of Rs 3.57 and thus a litre of petrol cost a consumer Rs 70.41.

Thus, a consumer shelled out Rs 40.02 as additional charges which amounts to a massive 131 per cent of the base price which a dealer pays. Bringing petrol even under the highest GST slab of 28 per cent would subsume most of these taxes resulting in a minimum decrease of Rs 31 per litre in the price of petrol in the national capital. 

It thus takes no rocket science to conclude that bringing petroleum products under GST will come as huge relief for consumers and perhaps save the government much of the ire it is facing on this count.

Mathematics of rising petrol, diesel prices: Blame govt taxes, not crude oil for steep hike in cost of petroleum products

Impact on Government Finances

Regardless of the political benefit that the government may reap from bringing petroleum products under GST, it appears to be in no mood to go ahead and do it and there appears to be good reason behind it. Bringing petroleum products under the ambit of the GST will result in big losses for both the Centre as well as states, resulting in a huge hit on their revenues and making the state exchequer poorer. 

Consider the facts that somewhat explain the Centre’s conundrum first. The 12 increases in central excise duty effected by the government since November 2014 have resulted in the government hitting a jackpot as revenue from petroleum products rose from Rs 3.32 lakh crore in 2014-15 to Rs 5.24 lakh crore in 2016-17.

Coming to states, the very rationale behind the government's decision to exclude fuel in GST was to insulate states from loss of revenue. Consider Delhi as an example. The state earns 27 per cent VAT from sale of a litre of petrol. On top of that, the states also receive 42 per cent of the Excise Duty charged by the Centre, according to Oil Minister Dharmendra Pradhan.

In all, the state earns Rs 23.98 from sale of each litre of petrol. In case, the 28 per cent GST is applied, the states will be entitled to 14 per cent of it in the form of SGST (State goods and Services Tax) which will amount to Rs 4.29, thus causing a loss of Rs 19.69 per litre to the state exchequer.

It is no wonder that the governments will be reluctant in bringing fuel products under the ambit of GST. It is for the revenue factor that the government has shied away from bringing petro products under the GST ambit.

Public Posturing vs Good Economics

When the Oil minister says that the Petroleum ministry has urged the Finance ministry to consider bringing fuel under GST to contain prices, it may be after all just posturing. The government is not the one which has to take a call on the matter. Instead, it is the all-powerful GST Council that will. Considering that this Council is made up of state Finance Ministers, there is good reason that the move, if proposed will be rejected, or at least indefinitely stalled. The Centre will be able to put the onus of the decision on states, and we may never know the end of it.

But there are other factors at play as well. The Indian economy is in its most critical phase under the current dispensation. Growth has taken a hit and economic indicators are discouraging to say the least. The economy is in doldrums, jobs are missing, monsoons haven’t been as good as expected, and demonetization and GST rollout have hit private investment. Even the RBI dividend came down by half from Rs 65,876 last year to Rs 30,659 this year.

In such a scenario, the only positive for the government going forward is the revenue growth it has seen from petroleum products. With promises of big infra spending and development, the government knows it will have to deliver in order to retain the mandate it has received from the people. On the other hand, the pinch of petrol and diesel prices is hurting its pro-people image, with the verdict now out that the taxes it levies is causing much of their pain. 

The Finance Minister, thus, is walking an extremely tight rope. On one hand is the public sentiment with respect to the government that he will be expected to maintain and on the other is the hit that its revenues will take if he does decide to propose a move to bring fuel under GST.

We have heard more often than not that this government is one that does not hesitate in taking tough decisions. We saw it too on November 8 when the Prime Minister announced demonetization of Rs 500 and Rs 1000 notes, wiping away 86 per cent of the currency in circulation. People bore the pain and trusted this government’s intent.

With 2019 not too far away, one wonders whether the decisiveness of the Prime Minister and his government can translate into some relief for the people. They will be watching.

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