The GST journey began in the year 2000 when a committee was set up to draft law that will be known as Goods and Services Tax and it will subsume almost all indirect taxes and it will become One tax for One Nation however it has taken around 17 years from then for the Law to evolve and become Goods and Services Tax Act, 2017. In 2017, the GST Bill was passed in the Lok Sabha and Rajya Sabha. On 1st July 2017, the GST Law came into force.
The finance ministry’s draft proposal at that time in year 2016 and in early 2017 for the GST regime proposes to keep crude oil, petrol, diesel, ATF and natural gas permanently outside GST through a constitutional amendment however they had a aim that Government will include these items i.e., Petroleum products under GST after proper implementation of GST, after discussing with all the state Governments. This has been done to protect finances of states, which rely heavily on collections from levies on oil products for their budgetary targets. India is 85 per cent dependent on imports to meet its oil needs and so retail rates are linked to international prices.
Fuel particularly petroleum products account for a major part in the GDP of India, as they are most consumable items as well as needed for day-to-day operation for poor person to richest person. Being an item that is majorly imported it has an important bearing of the center as well as the states and UTs, may it be in the form of custom, excise, etc. Directly or indirectly fuel impacts each and every human being and every other commodity. The government suffices most of its revenue requirements by levies on fuel items. GST would attract a maximum tax of 28% on it except if any extra cess is imposed upon it as in the case of sin products and on luxury vehicles. However, levying an extra cess would have political oppositions apart from parting it within the 28% tax bracket.
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WHAT IF PETROLEUM PRODUCTS COMES UNDER GST?
Under GST, the petrol and diesel prices under the present circumstances will become substantially cheaper. The GST regime provides five different taxation rates of 0, 5, 12, 18 and 28 per cent. Petrol and diesel can’t be expected to be taxed below/more than 28 per cent in the current scenario as it is major revenue part of Government.
At 28 per cent GST, the petrol and diesel will be sold at cheaper than the current rate for one litre of the fuel. If the compensation cess will be imposed over and above 28 per cent GST on petrol, it will still be cheaper than the existing rate.
Discussion of NITI Aayog
Recently NITI Aayog held a discussion, Centre will require to make a bigger revenue sacrifice than the states for the plan because of its current very high tax rates on petrol and diesel, the compensation offer could be used as a bargaining tool for securing the states’ consent for the plan, NITI Aayog feels.
Kerela High Court vs Central on Inclusion of Petrol, Diesel under GST
Recently, a petition has been file in the Kerala High Court and urged that petrol and diesel rates differ in various states as the tax levied by each state is different. It was contended by the petitioner that unification of the tax on petrol and diesel is required, and further pointed out that frequent price increases are adversely affecting the life of citizens as prices of common goods also increase with the increase in fuel price. The division bench asked the government to take a decision on the representation raising the demand within six weeks after considering a petition. While responding Counsel for the Central Board of Direct Taxes and Customs furnished some points. The court observed that even though the matter was taken in the 45th GST Council meeting, three issues seemed to have been considered by the Council with respect to bringing the petroleum products under the GST regime. The reasons for not including the fuel in the GST were high revenue implications and that it would be difficult to bring petroleum products under the GST regime during pandemic times and the need for more deliberations. The court said that the “pandemic period cannot be cited as a reason. It is well known that even during pandemic period, several decisions were taken involving revenue, after deliberations”.
Difficulties to include Petrol Petroleum Products comes under GST
There are some major difficulties in our system and due to these problems, these items are not yet included under GST. Reasons are given below: –
1. Different Vat Rates in States: –
Reason is that the rate of VAT on petrol and diesel varies amongst states. Different states charge different rates of Vat. If GST will be imposed, then the prices will increase in states where Vat rates are low, but on the other hand, they would fall in states where rates of Vat is higher. It may impact States in a problem because of revenue loss to states in which Vat rates were higher but in other states it will increase revenue dramatically.
2. Issues of State Governments: –
Many states are unhappy with the GST system as it hasn’t yielded the promised revenue productivity, though experts attribute this to flawed structure of the tax and the cuts in tax rates. These states lament the proven inadequacy of the compensation mechanism for their revenue loss. States in general are also apprehending a revenue shock once the compensation period expires in June 2022, and are demanding an extension of the mechanism. State Government have issues related to reduction in revenue due to one single rate and these states may loss in revenue also states may lose control on fixing prices by increasing / decreasing rates time to time for political benefits or other reasons.
3. Resultant in Revenue decrease: –
Centre and states governments together earn over ₹5 lakh crore annually from tax on petroleum products. If petroleum products are brought under the GST, 28% tax would be collected on them as that is the highest slab in the tax regime. “At present around 60% tax is being collected on petroleum products. This would result in a shortfall of ₹2 lakh crore to 2.5 lakh.
4. Concern for Green Energy:-
Central and State Governments are concern wholly for green energy due to rise in Pollution in states like Delhi etc. State and Central Government are giving incentives for purchase electric vehicles and for less consuming Petrol and Diesel. Accordingly , if Rates of petrol and diesel will become cheaper by inclusion in GST it may impact in rise of Sell of Petrol and Diesel Vehicles and it will adversely affect Green energy campaign of Governments.
Conclusion
Hence, even if petrol and diesel are brought under GST, they will have to be taxed at a very high rate. Currently, the highest rate of GST is 28%. Of course, there are surcharges and cess that can be charged by the government over and above this. It can be concluded in view of the above that it is quite impossible as of now to bring petrol and diesel under GST regime in the next five to seven years because states would not be ready for an annual revenue loss of ₹2 lakh crore (collectively by all states)
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- Original Article published in ICAI-CIRC December 2021 Edition.
Disclaimer: – The purpose of writing this article is to enlighten the readers with the above-mentioned Subject Under no circumstances, the author would be held liable in any way for any damage arising from using this article.
Author : The author CA Amit Kumar Sharma, is a Chartered Accountant. He is a Direct & Indirect Tax Consultant and an author. The author can also be reached at [email protected] .
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