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The Goods and Services Tax (GST) Council has recently decided to keep petroleum products out of the GST regimes.

As the retail prices of petroleum products are soaring, demand for price reduction has gained momentum.

Fuel prices in India

India meets its domestic oil demand mainly through imports.
While international crude prices have risen sharply in the last six months, a major reason for the high selling price of petrol is the high levy of local taxes.

Factors affecting fuel prices?

Crude oil production and pricing
Rupee vs. Dollar Rates
Demand-Supply scenario
Internal transportation
Pricing mechanism

Present taxation of Fuels

Currently, taxes on petroleum products are levied by both the Centre and the states.
While the Centre levies excise duty, states levy value added tax (VAT).
For instance, VAT on petroleum products is as high as 40% in Maharashtra, contributing over ₹25,000 crore annually.
By being able to levy VAT on these products, the state governments have control over their revenues.
When a national GST subsumed central taxes such as excise duty and state levies like VAT on July 1, 2017, five petroleum goods – petrol, diesel, ATF, natural gas and crude oil – were kept out of its purview.

Why bring Petro/Diesel under GST?

GST is being thought to be a solution for the problem of near-record high petrol and diesel rates in the country, as it would end the cascading effect of tax on tax.
The state VAT is being levied not just on the cost of production but also on the excise duty charged by the Centre on such output.

Why were they left out of GST?

This is because both central and state government finances relied heavily on taxes on these products.
Since GST is a consumption-based tax, bringing petroleum under the regime would have mean states where these products are sold get the revenue and not the producer ones.
Simply put, Uttar Pradesh and Bihar with their huge population and a resultant high consumption would get more revenues at the cost of states like Gujarat.
Under the present Covid situation, bringing petroleum products under GST will be a very tough call for both the Centre and states “as both will stand to lose”.

Typically, for every Re 1 of excise hike on petrol and diesel, the gain to the exchequer is around Rs 13,000-14,000 crore. However, with the Covid-related consumption slump, the gains may be a bit lower than this.

How does this impact consumers?

High oil prices add to inflationary pressures. Inflation poses a challenge to growth.

Record high prices for diesel means that the cost of transporting goods goes up across the country which in turn could result in increasing the prices of essential commodities like fruit and vegetables as well.
Household incomes see a perceptible drop and gradually even the demand for discretionary goods starts declining.
Petrol and diesel have a combined weight of 4.69% in the wholesale price index and 2.34% in the retail price index.
Any increase in the prices of the transport fuels affect the WPI more than the CPI but what is more worrisome is the pass-through effect the increase in fuel prices can cause.

Impact of inclusion of fuel under GST

If petroleum products are included under the GST, there will be a uniform price of fuel across the country.
However, petroleum products coming under GST not necessarily means that taxes or prices will come down.
If the GST council decides to opt for a lower slab, taxes may come down.
At present, India has four primary GST rates – 5 percent, 12 percent, 18 percent and 28 percent.
Levying a standard rate of GST on petrol would mean that the prices increase dramatically in Andaman and Nicobar, but on the flip side, they would fall in Maharashtra if the cumulative rate is lower than the current rate.

Way forward

The government can offset the prices by lowering excise duty slightly, which saw an exorbitant hike during March last year.
This window, the experts say, is available to the government only this year.
Next year, when the demand for transport fuels comes back to pre-pandemic levels and there is sharper upward revision, the risk to inflation will be much higher and may leave no ammunition with the government.