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GST on Petrol and Diesel: What will be the effect on fuel prices and economy?

Tulika Tandon

The 45th GST Council is meeting in Lucknow for the first time in 20 months. Much speculation has been made about the prices of petrol and diesel since then. Currently petrol in Delhi is priced at INR 101.19 per litre while diesel is available at INR 88.62 per litre. In Mumbai petrol is sold at INR 107.26 per litre while diesel is INR 96.19 per litre.

It is known that the fuel prices in India are different from 1 state to the other and the reason is local taxation on them. This means the fuels are charged under VAT and freight charges. Also the Central Government charges an excise duty on them. 

The prices are soaring sky high and the citizens or the common men are under immense pressure. The Government is thinking of including the petrol and diesel under GST as a solution to reduce the soaring prices of petrol and diesel in the country. It would also put an end to the cascading effect of tax on the fuels. 

So will the move of putting petrol and diesel under the GST ambit be beneficial for people? Will the prices drop or rise? Let us know it below. 

Government of India  earns trillions of rupees in taxes through fuel revenue. In 2019-20 the tax revenue due to fuel was 4.24 trillion rupees. So the big question is why would the Government want to cut such an easy source of money?

The high rates of petrol and diesel have made various economists suggest reduction in excise duty so as to get commuters the relief they need. 

The fuel demand has risen already as the offices of many have resumed and the fuel prices in India have also touched record heights. As per many economists, the prices of petrol and diesel would fall to as much as INR 75 per litre and INR 68 per litre in case they are brought under GST regime. 

GST on Petrol and Diesel: Significance

When GST was introduced these major commodities were kept out of the purview:

  1. Crude Oil
  2. Natural Gas
  3. Petrol
  4. Diesel
  5. Aviation Turbine Fuel

Here's how putting petrol and diesel under GST would affect its prices:

  1. As per the SBI economists, the prices of fuel would come down under the ambit of GST. 
  2. Finance minister Nirmala Sitharaman had told the Press Trust of India, “Whenever the GST Council decides to take up this issue, they are well within their interest to take it up and discuss. It's a call that the Council has to take.”
  3. In 2019-20, governments had earned around ₹4.24 trillion by taxing petroleum products.
  4. If the GST Council decides to bring petrol and diesel under the ambit of GST, it will have to ensure that governments continue to earn the kind of money through petroleum taxes that they have been in the past.
  5. About 60 percent of the petrol price and 54 percent of diesel. At present the states are levying a combination of ad valorem tax, cess and extra VAT on their need basis. 

Revenue for Government: 

  1. The Government enjoys massive amounts of revenue on petroleum products at both state and central level.,
  2. According to the data released, the central government and the state government raised INR 556 lakh crore in revenues from petroleum sector by March 31, 2020. 
  3. It is obvious that the state after collecting such revenue would wish to shift to a GST system. Such a move on the other hand would allow the consumers to pay INR 30 less.  

Petrol and Diesel under GST: Effects and Consequences

Combined revenue loss for the Government

In case the fuel prices are brought down and if the fuel prices come under the ambit of GST, the loss on revenue combined would be 0.4% of the GDP. 

The current tax regime allows the Government as much as 160.82% of tax on petrol.

Understanding the Breakdown:

  1. The price charged to dealers by oil marketing organizations on 1st March was INR 33.54 per litre. Over this was an excise duty of INR 32.90 per litre with an additional dealer commission of INR 3.69 per litre. 
  2. This adds up to INR 70.13 per litre. There was also a value-added tax of 30%, chargeable by the state government, that adds up to INR 21.04 per litre. 
  3. The price of retail petrol in Delhi was INR 91.17 per litre as calculated from above. Similar calculation goes for other states as well based on their percentage of taxes.
  4. The total tax on petrol in Delhi is thus INR 53.94 per litre. This makes the total tax on petrol to almost 161% of the price charged to dealers.
  5. Also,145% of the price charged to dealers would be added to the commission earned by them. For diesel all taxes add up to 124%. The GST slabs are 5%, 12%, 18% and 28%, which is how the Government would not get the tax above a fraction of what they get now. 

For petrol and diesel to be brought under GST, the rates would have to cross the extreme higher percentage than 100%. It is only then that the governments be able to earn the kind of money they currently are. Also the Government has to get its economic growth back to where it was to follow this regime, which is quite not possible in the coming year. 

Also Read| Dandi March: 91 years of Salt Satyagraha, it's history, significance and about Azadi Ka Amrit Mahotsav

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