India levies one of the highest taxes on petrol and diesel in the world. At present, 60 percent tax is being collected on petroleum products.
Currently, petrol, diesel and other associated products are not subject to GST (Goods and Services Tax), but are subject to excise tax (by the Union government) and VAT (value added tax levied by each state at different rates).
The excise duty from petroleum products contributes up to 90 percent of all excise duty collected by the Centre. The Centre levies an excise duty of Rs 33 on a litre of petrol.
VAT varies from state to state. Rajasthan levies the highest local taxes on petrol and diesel, followed by Madhya Pradesh, Maharashtra, Andhra Pradesh and Telangana.
Before May 2014, excise duty on petrol was Rs 9.48 per litre - the current rate is almost three times. On diesel, central taxes were Rs 3.56 a litre, prior to 2014. Today they are almost 10 times that.
Prices of petrol and diesel in the neighbouring countries of China, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan and Myanmar are much lower than that in India. They too import a substantial proportion of petroleum, but taxes in these countries are not as high.
In Canada, the tax on these products ranges from 15 percent GST (5 percent in case of non-participating provinces) plus around 2The United States imposes taxes at rates as low as around 15 percent. In the European Union, taxes range from around 45 percent to 60 percent.
High oil prices add to inflationary pressures. Record high prices for petrol/diesel means that the cost of transporting goods goes up across the country which in turn can result in raising the prices of essential commodities.
Household incomes see a perceptible drop and adversely affect the demand. Inflationary risks are higher in 2022-23, as the global oil price forecast has now revised up to $75 a barrel, from $60 previously for 2022, as per Wall Street brokerage Bank of America Securities report.
Centre and states together earn over Rs 5 trillion annually from tax on petroleum products. If they are brought under the GST, it would result in a shortfall of Rs 2 to 2.5 trillion cumulatively to both the Centre and the states.
Finance Minister Nirmala Sitharaman had recently said in Lok Sabha that she would be ‘glad’ to discuss the suggestion of bringing petrol and diesel under the ambit of GST. The duties on petrol are levied both by the Centre and the states and both would have to work together on this. There were no hurdles from the Centre’s side, and the GST Council would have to take a call.
After widespread consultation with stakeholders, the NationalDemocratic Alliance government introduced the 122nd Constitution Amendment Bill in 2014, whereby the only exclusion from GST was alcohol for human consumption and a provision to the effect that the aforesaid petroleum products would be subjected to GST with effect from such date as the Council may recommend.
Such a delayed choice approach was adopted in view of the reluctance of the states to subject around 25-30 percent of their assured tax revenues to the initial uncertainties of a new tax regime.
Accordingly, sections 9(2) and 5(2) of the CGST/SGST Act and the IGST Act, respectively, explicitly provide for levy of GST on these products with effect from such date as the Council may recommend.
This was a far-sighted move on the part of the NDA government which now enables the levy of GST on these products without making any further amendment to the Constitution.
For a post-pandemic economic recovery, economists believe it is important that taxes on petroleum and its products are reduced. It happened during the global financial crisis of 2008-09 and gave an immediate push to factory production and the economy.
Reserve Bank Governor Shaktikanta Das too has urged the government for a calibrated unwinding of fuel taxes to reduce price pressure in the economy. Levying GST on petrol products at 28 percent would go a long way in easing such pressures.