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Finance Minister and TN on fuel taxes and GST for fuel

Context:

Indian Finance Minister took on the Tamil Nadu government or reducing State levies on petroleum products by ₹3 a litre, after an earlier hike of ₹7 a litre (by the previous AIADMK regime), and accused it of being party to the UPA’s “trickery” of lowering fuel prices by issuing oil bonds.

Previously, the Finance Minister of India had said that the Centre is ready to consider bringing fuel under the Goods and Services Tax regime if the States bring up the issue at the GST Council.

Relevance:

GS-III: Indian Economy (Economic Development of India, Macroeconomics- Taxation)

Dimensions of the Article:

  1. Current Pricing of Petrol and Diesel
  2. How much tax do we pay on petrol and diesel?
  3. Bringing Fuel under GST
  4. Impact of Bringing Fuel under GST

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 what it is currently.

How much will be the 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

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