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Petrol price have already breached Rs 100-mark in major cities.

The price of petrol has crossed the Rs 100 mark in all the four metros. It is Rs 107.20 a litre in Mumbai, Rs 101.92 in Chennai, Rs 101.35 in Kolkata and Rs 101.19 in Delhi. The price of diesel per litre is Rs 97.29 in Mumbai, Rs 94.24 in Chennai, Rs 92.81 in Kolkata and Rs 89.72 in Delhi. The State Bank of India in its July Ecowrap research report says with every 10% increase in petrol prices, there is 0.5 percentage point increase in retail inflation, which was 6.26% in June, above the RBI’s comfort zone. Prices of petrol and diesel have indeed risen by as much since mid-May.

The report points to a squeeze on healthcare spending owing to an increase in expenditure on motor fuels among SBI card holders. Expenditure on groceries and utility services has also been displaced to such an extent that demand for them has “significantly” declined. Non-discretionary spending on items like fuel has jumped to 75% in June from 62% in March, the SBI report says.

Petrol and diesel are taxed high to curb over-use and limit the damage to the environment. But during Covid times, when there are restrictions on travel by public transport and physical distancing is needed to prevent infection, high taxation is not desirable as it penalises people for essential travel.

GST is not the solution

Will bringing petroleum products, including petrol and diesel, under the ambit of Goods and Services Tax help? GST will prevent cascading, as taxes paid on inputs are allowed to be deducted through a mechanism of tax credits and only the value added is taxed. It will make goods and services more competitive. Taxes should not be exported. That is why exports are zero-rated. But since petroleum products are not covered by GST, taxes paid on them for export production cannot be offset. Amendment to the constitution allows petroleum products to be brought under GST; it’s for the GST Council to decide when.

M. Govinda Rao says this may be the right time to bring motor-fuels under GST as the technology platform on which it rides has stabilised and GST collections are rising. GST collections were above Rs 1 trillion for eight months in a row till June, when they fell to Rs 92,849 crore. The collections in June pertain to business transactions during May when there were Covid-related restrictions across the country. Rao is a former director of the Delhi-based National Institute of Public Finance and Policy (NIPFP). He was also a member of the 14th Finance Commission whose term expired in October 2014. Among other things, finance commissions, fix the share of central tax revenues that should be shared with the states. Currently, this share is 42%.

If GST is applied to petroleum products at the current maximum rate of 28% on the base price of petrol of Rs 39.29 in Delhi, the retail price will be Rs 50.68, excluding dealers’ commission. Diesel will sell for Rs 46.06. That will result in a huge loss of tax revenue.

Revenue loss

Currently, the Centre charges Rs 32.9 as taxes on a litre of petrol. State value added tax (VAT) on petrol is a mix of ad valorem rates and specific charges. In Andhra it is 31% plus Rs 4 a litre plus Rs 1 road development cess. Delhi charges 30%. On the retail price of Rs 98.80 on 1 July, the tax component in Delhi was Rs 55.7 or 56%. That is double the maximum GST rate.

On diesel, central excise and cesses are Rs 32.90. Delhi charges 17% VAT. The tax component on a litre of diesel retailing for Rs 94.49 in Delhi on 1 July was 57.90%.

To make up for the loss of revenue, petroleum products if covered by GST may have to be taxed like luxury cars. While small cars are taxed at 28% plus 1% compensatory cess, sports utility vehicles of 1500 cc and more and running on diesel are charged 28% GST plus 22% compensatory cess or 50%.

Dependency

Both Centre and the states are overly dependent on petroleum taxes. They may not ease their grip on them. According to the Petroleum Analysis & Planning Cell of the oil ministry, excise fetched Rs 3.71 trillion to the Centre in revenue last year. The states earned Rs 2.03 trillion in VAT.

But the Centre collects most of the taxes it levies in the form of surcharges and cesses which are not part of the divisible pool and therefore not shareable with the states. Of Rs 32.90 on a litre of petrol it shares just 42% of the basic excise duty (BEC) of Rs 1.4 per litre with the states. On diesel the central levy is Rs 31.80 per litre of which Rs 1.8 goes to the divisible pool. At a press conference last month, Tamil Nadu’s Finance Minister P Thiaga Rajan complained that it got only Rs 837 crore as its share of central excise on petrol and diesel in 2019-10.

Even if petroleum products are taxed at a rate much higher than the current maximum of 28%, it will make taxation more equitable for the states. It will also make our manufactures and services more competitive. Prices may not decline by much, unless the economy takes off and tax revenues from other products and services expand to enable a lowering of the tax burden on petroleum products.