petrol rates: View: Inclusion of fuel under GST should be rule-based

petrol rates: View: Inclusion of fuel under GST should be rule-based

As the Indian economy recovers from the Covid shock and climbs a slow grind higher, the unprecedented high retail price of petroleum products remains a concern. While international crude oil price (at around US$75 / barrel) today is nearly 50% lower than its all-time high in July 2008, India’s gasoline and diesel prices are higher today by about 100% and 150% respectively since that time.

Taxes on petroleum products follow a complex structure involving central excise duty and a combination of various state level taxes (eg., cess, extra VAT, surcharge, ad valorem tax) that varies heavily across states.

Still, around half of the retail price for fuel that a consumer pays in India today comprises taxes paid either to central or state governments. Instead, even if fuel was taxed at the highest GST rate of 28%, it would reduce retail price for petro products by over 30%.

The Covid shock posed fresh uncertainties to the revenue sources of both the central and state governments and the relative contribution of fuel related taxes to the exchequer has increased of late. For state governments, tax on fuel, along with that on liquor and property, are traditionally key sources of own tax revenue. Thus, it is not surprising that several states have concerns that if these items come under the ambit of GST, it might lead to delays and periodic negotiations with the federal government for getting their share of the GST.

In the long run, bringing petrol and diesel under GST would definitely be preferred to ensure greater functional ease across states as well as lower price burden for the consumers, likely extending benefits both on growth and inflation fronts at the macro level.

However, a directional agreement and commitment across the political spectrum is the starting point for moving towards this goal. Also, strongly defining the centre-state revenue sharing formula as part of the FRBM regulations with near-zero provisions for “exceptional circumstances” has to be the cornerstone for such a move.

This should lead to a strong rule-based formula with no or limited room for discretion leading to less uncertainty and should, to an extent, help addressing the hesitation on the part of several state governments in foregoing a key component of their own tax revenue.

Meanwhile, as interim arrangements, we can explore a few related policy initiatives. First, introducing an oil price stabilisation fund may help buffer domestic retail prices during times of higher international crude prices and/or exchange rate volatilities by drawing down savings made during better times. This should partly reduce uncertainties for all concerned – consumers, OMCs and fiscal authorities.

Also, any revenue due to “super normal” tax earned by a government over and above the highest prevailing GST rate may be stipulated to be spent in areas of priority and long term social benefit (eg., key capex, healthcare, education, skill development) specified at the project level, rather than for meeting the governments’ immediate cash flow needs such as salary payments and interest burdens on past loans.

Admittedly, funds are fungible at the hands of the government; still this may gradually help pave the way for greater fiscal accountability towards a more desirable spending mix over time.

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