The GST Council might consider taxing petrol, diesel and other petroleum products under the single national GST regime in the upcoming meeting in Lucknow, a move that may require huge compromises by both central and state governments on the taxing these products.
GS-III: Indian Economy (Economic Development of India, Macroeconomics- Taxation)
Dimensions of the Article:
- What is GST?
- GST Council
- Matters on which GST Council makes recommendations
- Current Pricing of Petrol and Diesel
- How much tax we pay on petrol and diesel?
- Bringing Fuel under GST
- Impact of bringing Fuel under GST
What is GST?
- GST is a destination-based indirect tax and is levied at the final consumption point. Under it, the final consumer of the goods and services bear the tax charged in the supply chain. GST is a transparent and fair system that prevents black money and corruption and promotes new governance culture.
- Goods and Services Tax (GST) Act came into effect in 2017.
- Goods and Services Tax (GST) was introduced by the Government of India to boost the economic growth of India. GST is considered to be the biggest taxation reform in the history of the Indian economy.
- The power to make any changes in the GST law is in the hands of the GST Council. GST Council is headed by the Finance Minister. One hundred and first amendment act, 2016 introduced the GST in India in July 2017.
- Goods & Services Tax Council is a constitutional body for making recommendations to the Union and State Government on issues related to Goods and Service Tax.
- As per Article 279A (1) of the amended Constitution, the GST Council has to be constituted by the President within 60 days of the commencement of Article 279A.
- The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2016, for the introduction of Goods and Services Tax in the country was introduced in the Parliament and passed by Rajya Sabha on 3rd August 2016 and by Lok Sabha on 8th August 2016.
- GST Council is an apex member committee to modify, reconcile or procure any law or regulation based on the context of goods and services tax in India.
- The GST council is responsible for any revision or enactment of rule or any rate changes of the goods and services in India.
- The council contains the following members:
- Union Finance Minister (as chairperson)
- Union Minister of States in charge of revenue or finance (as members)
- The ministers of states in charge of finance or taxation or other ministers as nominated by each state’s government (as members).
Matters on which GST Council makes recommendations
- Taxes, cesses, and surcharges levied by the Centre, States and local bodies which may be subsumed in the GST;
- Goods and services which may be subjected to or exempted from GST;
- Model GST laws, principles of levy, apportionment of IGST and principles that govern the place of supply;
- Threshold limit of turnover below which goods and services may be exempted from GST;
- Rates including floor rates with bands of GST;
- Special rates to raise additional resources during any natural calamity;
- Special provision with respect to Arunachal Pradesh, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and
- Any other matter relating to the goods and services tax, as the Council may decide.
Current Pricing of Petrol and Diesel
- As per the latest (as of March 2021) price-build of petrol and diesel: State taxes had a smaller contribution to the retail price than central taxes.
- While the state Value Added Tax (VAT) was just over 10 and 20 rupees, on diesel and petrol respectively, the union excise duties for both petrol and diesel exceeded 30 Rs.
- These headline numbers suggest that the centre is a bigger beneficiary of tax incomes from the sale of petrol and diesel.
- This is because FFC’s earmarked share of states in centre’s revenues applies to what is called the divisible pool of taxes, which excludes cess and other forms of special taxes. Overtime, the weight of cess and other such non-sharable taxes has been increasing in the centre’s gross tax revenue. This, in practice, has meant that the share of states in gross total revenue of the centre has never reached 41% and in fact gone down overtime.
How much tax we pay on petrol and diesel?
- The Union and state levies put together account for roughly 55 per cent and 52 per cent of the retail price of petrol and diesel respectively.
- These work out to around 135 per cent and 116 per cent of the base prices of the two products respectively.
- The central levy on petrol and diesel works out to around 36 per cent of the retail price while the state component is around 20 per cent (diesel) to 28 per cent (petrol).
- Of the total central levies on petrol and diesel, Rs 1.40 per litre and Rs 1.80 per litre is the basic excise duty for the two fuels, and Rs 11 per litre and Rs 18 per litre is the special additional excise duty.
- Both these components form part of the divisible pool of taxes i.e. 42 per cent of which (approximately Rs 52,000 crore) goes to the states.
- The remaining portion of Rs 18 per litre in both cases is the Road and Infrastructure Cess and Rs 2.50 per litre and Rs 4 per litre is the Agriculture Infrastructure and Development Cess which are retained by the Centre.
Bringing Fuel under GST
- Economists have said that bringing petrol and diesel under the goods and services tax is an unfinished agenda of the GST framework and getting the prices under the new indirect taxes framework can help.
- Centre and states are loathing to bring crude oil products under the GST regime as sales tax/VAT (value added tax) on petroleum products is a major source of own tax revenue for them.
- Thus, there is lack of political will to bring crude under the ambit of GST.
- At present, states choose to levy a combination of ad valorem tax, cess, extra VAT/surcharge based on their needs and these taxes are imposed after taking into account the crude price, the transportation charge, the dealer commission and the flat excise duty imposed by the Centre.
Impact of bringing Fuel under GST
- A growth in the consumption – diesel going up 15 per cent and petrol by 10 per cent – has been used to assess the Rs 1 lakh crore fiscal impact of getting petroleum prices under GST.
- States, which have the highest share of tax revenues at present, will be the biggest losers if the system shifts to GST.
- However, such a move will help consumers pay up to Rs 30 less per liter of fuel. This is because he highest slab under the existing GST rates is 28%. Even if petrol and diesel were to be taxed at the highest rate, the post-tax price will be much lower than what43 it is currently.
Loss of revenue
- A 28 per cent levy of GST on the base price would fetch around Rs 5.40 per litre on petrol and around Rs 5.45 on diesel to the central and each of the state governments.
- Contrast the above with the current yield of Rs 32.90 per litre on petrol and Rs 31.80 per litre on diesel to the Centre alone and an average of around Rs 20 per litre and Rs 15 per litre on petrol and diesel, respectively, to each of the states.
- This, however, would bring down the prices of petrol and diesel to around Rs 55 per litre.
- This would translate into a revenue loss of around Rs 3 lakh crore on account of petrol and around Rs 1.1 lakh crore on account of diesel to the Centre and the states, at current volumes.
Loss of autonomy
- Once petrol and diesel are subsumed within the GST, both the Centre and states will have to give away the current autonomy they enjoy with these taxes which serve twin purposes of counter-cyclical interventions in the realm of both politics and economy.
- For example, both the Centre and the states increased taxes on petrol and diesel to compensate for revenue loss during the lockdown.
- The central taxes on petrol and diesel are a fixed amount per litre rather than a fraction of the base price, which is how GST is levied currently.
- Also, the current regime allows individual state governments to change their taxes – poll bound Assam has reduced taxes on petrol-diesel – a leeway which will not exist once they are subsumed within GST, as taxes will have to be uniform across the country.
-Source: The Hindu