Why petrol, diesel are not under the GST

The last time the centre reduced the excise duty on fuel was in October 2017. Though Finance Minister Arun Jaitley had said earlier that the centre favours bringing petroleum products under the GST umbrella, a short-term intervention is unlikely as it may disturb the fiscal deficit situation.

twitter-logo BusinessToday.In   New Delhi     Last Updated: May 21, 2018  | 23:33 IST
Why petrol, diesel are not under the GST

Spiralling petrol and diesel prices are burning a hole in people's pocket with no signs of recovery. With this, the debate around excise duty cut and the inclusion of automobile fuel under the GST has emerged again with India Inc asking the government to take immediate measures.

India's top industry bodies Assocham and Ficci have said it is important the government cut excise duty on petrol and diesel and also consider including automobile fuel under the GST for a long-term solution. Both the bodies have said a weakening rupee would increase the country's import bill and would have a cascading impact on inflation, thereby posing a risk to the country's growth trajectory.

Ficci President Rashesh Shah said: "With global oil prices once again spiralling upwards, the macro-economic risks of higher inflation, higher trade deficit and pressure on balance of payments with attended consequences for the rupee value have once again surfaced." He said a weakening rupee will hurt the country's import bill, and there's a risk of monetary policy turning hawkish, which in turn would affect private investments.

Assocham Secretary General DS Rawat said while cut in excise duty on fuel may provide temporary relief, the sustainable solution lies in the automobile fuel coming under GST, which can happen only after the Centre and states together reduce their dependence on fuel.

The last time the centre reduced the excise duty on fuel was in October 2017. Though Finance Minister Arun Jaitley had said earlier that the centre favours bringing petroleum products under the GST umbrella, a short-term intervention is unlikely as it may disturb the fiscal deficit situation. The problem is that the effective sales tax on fuel varies wildly from state to state. For example, Maharashtra charges 40 per cent on petrol while Andaman and Nicobar charges just 6 per cent ad valorem. The effective sales tax on diesel ranges from 6 per cent to 29 per cent. This means, every time there's an increase in crude oil prices, it brings more revenue to the states. The Centre also charges a fixed amount of Rs 19.48 on per litre of petrol and Rs 15.33 on diesel across the country. The total levies put together are nearly 60 per cent, and if the central levy and dealers commission are added, the amount goes up to nearly 100 per cent over the real cost of fuel.

Experts suggest if petroleum is included in the GST, the Revenue Neutral Rate (RNR) could be as high as 100 per cent. This will not be acceptable to the states charging lesser levies than others as they will see a sharp rise in fuel price. It's also an unlikely scenario that states might agree to let go their levies as they are battling revenue deficit since the launch of the new tax regime. On the centre's part too, the excise duty cut doesn't seem feasible as it would hurt its collections and disturb its plans to maintain fiscal deficit at around 3.2 per cent.

Brent crude oil prices touched $78.87 per barrel, up 0.5 per cent from last close, on Monday, while petrol and diesel prices reached a new high of Rs 76.57 and 67.82, respectively. With rising fuel prices, it is certain that high transport cost for vegetables and essential commodities will increase inflation. But experts suggest the government doesn't have enough to step in and announce cuts in levies to soften the fuel prices.

Also read: The decision to keep diesel, petrol prices high is bad economics and bad politics
 

 

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