GST on fuel can help rein in prices

Business Standard By Shine Jacob & Indivjal Dhasmana September 15, 2017 17:04 IST

States resist move as it curbs their flexibility

Photo: Shutterstock

The petroleum ministry's push for including crude oil, natural gas, petrol, diesel and aviation turbine fuel in the goods and services tax (GST) may bring benefits to the industry as well as customers at a time of rising retail prices. However, much of the benefits will depend on the GST rates applicable on fuel.

The GST Council is yet to decide on bringing fuel under the GST’s ambit. Finance Minister Arun Jaitley has asked states to lower their value-added taxes on fuel used for manufacturing.

Oil refiners and marketers are set to take a hit of Rs 25,000 crore a year because of the exclusion of the five petroleum products from the GST. Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation are likely to bear a loss of about Rs 5,000 crore in this financial year.

"If this is passed on to consumers, prices may increase by another 60 paise per litre, if the government allows them to do that," said Dhaval Joshi, an analyst with Emkay Global Financial Services.

Former Central Board of Excise and Customs chairman Sumit Majumder said that though input tax credit was available on state value-added tax (VAT), central excise and service tax, the credit couldn't be carried over among the levies. VAT is levied on the ex-factory price plus excise duty and service tax. The cascading of tax in the present system would be eliminated if GST were imposed on fuel, he said.

Majumder said states were not willing to bring petroleum under the GST because 50-55 per cent of their VAT revenue came from these products.

MS Mani of Deloitte said petrol pump owners also did not receive refunds for taxes paid on other goods and services used for establishing their outlets.

The GST Council will have to decide on fuel in two years. After two years, the anti-profiteering body will cease to exist.

Pratik Jain of PwC said bringing fuel under the GST would establish uniformity of prices but it was too early to say whether prices would decline. "That depends on the rate of the GST. The total incidence of taxes on most petroleum products is much higher and I doubt if the GST rate can be around 18 per cent," he said.

Apart from central excise, state VAT is added to fuel pricing. As each state has its own tax structure, prices vary from state to state. States are not keen on including fuel in the GST because they have flexibility in altering these taxes, a lever they will lose under the GST. Losing revenue on this account may not be a deal breaker because states are assured of compensation from the Centre for the first five years.

"States were not willing to include petroleum products in the GST regime because they wanted control over a major source of tax revenue," said Debasish Mishra, partner, Deloitte Touche Tohmatsu India. He added that this was leading to a continued distortion in taxes imposed by each state.

Abhishek Rastogi, partner, Khaitan & Co, said, "The inclusion of petroleum products in the GST is a necessity. The states should not worry about compensation as there are corresponding provisions."

Mani said petroleum constituted 25-30 per cent of the states’ gross domestic product. The GST is now levied on less than 70 per cent of state GDP as alcohol and real estate are also kept out.

On Thursday, crude oil prices were $55.16 a barrel, 50 per cent lower than the $109 a barrel in July 2014. Global crude oil prices had declined even further but the Centre has increased excise duty in phases and retail prices are now at levels prevailing three years ago.

The Centre has allowed oil marketing companies to change prices daily in step with international prices. Earlier, this was done once a fortnight.

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