The Goods and Services Tax (GST) is a destination-based indirect tax that aims to establish a unified framework for taxation, promoting the concept of ‘one nation, one tax’ while enhancing compliance and optimizing revenue. However, the exclusion of petroleum from the GST regime has hindered the achievement of its objectives.

This is attributed to the following reasons:

  • The current tax structure for petroleum products involves a total tax (VAT and excise duty) of over 100%, while the highest GST rate is 28%. Bringing petroleum products under GST would result in a reduction in revenue for both the state and central governments. This reduction could adversely affect their ability to allocate funds for essential areas such as developmental subsidies, social sector spending, and defence expenditures.
  • Many states derive a significant portion, up to 33%, of their total revenue from VAT on petroleum products. This provides them with substantial autonomy and independence in planning their expenditures.
  • States require considerable resources to fund healthcare services, support distressed families, and promote business activities. There is concern that bringing petroleum products under GST may limit their ability to finance these critical areas.
  • States have the flexibility to adjust their tax rates according to their specific needs, and the collection changes can be implemented almost instantly. This enables them to address unforeseen expenditure requirements efficiently.
  • Issues such as delays in GST compensation payments from the central government to the states and demands for an extension of the GST compensation period have led to a lack of trust.
  • The central government has increasingly resorted to cess and surcharges that do not contribute to the divisible pool, thereby denying states their rightful share of revenue collected from the general population of their respective states.

Despite the aforementioned factors, there is a compelling need to include petroleum and petroleum products under the GST regime due to the following reasons:

  • The varying tax rates on petroleum products contradict the fundamental principle of a unified GST tax regime.
  • Initially, the decision to exclude petroleum products from the GST regime was based on the notion that revenue from these products would provide stability during the transition period. However, with GST revenues having stabilized, it is now appropriate to bring petroleum under GST.
  • Citizens would ultimately benefit from the inclusion of petroleum products under GST, as they bear the direct impact of high fuel prices (such as LPG and automobile fuel) as well as indirect effects on inflation.
  • Including petroleum products in the GST would help control inflation, reduce logistics costs, and eliminate the cascading effect of taxation on industries that utilize petroleum products as inputs.
  • Bringing petroleum products under GST would depoliticize the issue of differing prices of petroleum in states governed by different political parties, thus mitigating a potential cause of intergovernmental tensions.

In conclusion, including petroleum products under GST would help realize the goals of a unified tax regime, alleviate inflationary pressures, and foster economic growth. However, this transition should be undertaken collaboratively, taking into account the concerns of all stakeholders and moving toward shared sovereignty in taxation.

Legacy Editor Changed status to publish January 13, 2024