GST Will Not Solve Problem of High Prices of Petrol and Diesel

In the recent past, suggestions have been made to bring petrol and diesel under the ambit of Goods and Services Tax (GST).

Actually, petroleum products are already under the ambit of GST, unlike alcohol, real estate and electricity. It's just that currently they are taxed at 0% under GST, and hence, no tax is collected.

Given this, in order to start taxing petrol, diesel, etc., under the GST, only a consensus of the GST council (a body which primarily consists of the finance minister of the central government and the finance/taxation ministers of the state governments) is required.

In order to understand how taxing petrol and diesel under the GST will make a difference, we first need to take a look at the current pricing mechanism. Let's consider the price of petrol in Delhi today, i.e., June 13, 2018.

The retail price of non-branded petrol is Rs 76.43 per litre. Table 1 tells us how we arrive at this price.

Table 1: Price build-up of petrol  

	(in Rupees)
Price charged to dealers	37.08
Excise Duty	19.48
Dealer Commission	3.62
Total	60.18
Value Added Tax (@27% of Total)	16.25
Retail price of petrol	76.43

Source: https://www.iocl.com/uploads/priceBuildup/PPAC-MS-13-6-18.pdf

Let's try and understand Table 1 in a little more detail.

The price charged to dealers by the oil marketing companies is Rs 37.08 per litre. On this there is a fixed excise duty of Rs 19.48 per litre charged by the central government. The excise duty on petrol had stood at Rs 9.48 per litre in September 2014. This was increased to Rs 11.02 per litre in October 2014. And then raised to Rs 21.48 per litre by July 2017. In October 2017, the excise duty on petrol was cut by Rs 2 and brought down to Rs 19.48 per litre, where it currently stands. State governments have also increased their taxes on petrol and diesel, over the years.

Over and above the excise duty collected by the central government, there is a dealer commission of Rs 3.62 per litre. Adding up the price charged to dealers, excise duty collected by the central government and the dealer commission, we get a total of Rs 60.18 per litre.

On this the Delhi state government charges a value added tax of 27%. Hence, 27% of Rs 60.18, works out to Rs 16.25. Adding this, gives us the ultimate retail price of Rs 76.43 per litre. This is the price petrol is sold at the pumps. Diesel, though sold at a different price, is priced similarly.

There are multiple problems with this structure. Let's discuss them one by one.

1) The price charged to dealers is Rs 37.08. On this there is a total tax of Rs 35.73 (Rs 19.48 excise + Rs 16.25 value added tax) or more than 96% of the price charged to dealers. This is too high. Nevertheless, how much to tax is the prerogative of the governments and one cannot argue much against this.

2) The value added tax charged by the Delhi government and other state governments, is ad-valorem, i.e., a certain proportion of the price. This basically means that the higher the price of petrol, the more the taxes earned by the state government. This isn't fair. Every state government makes an annual budget every year. In the budget, they project their expenses for the year. Accordingly, they project their revenues as well. Since revenues are projected in advance, the state government value added tax on petrol (and diesel) should be fixed per litre of sale.

3) There is double taxation happening in the current pricing structure. The state government value added tax is charged on the excise duty collected by the central government as well. This isn't fair again.

What would be the impact if double taxation is done away with? The price charged to dealers is Rs 37.08. Then there is a dealer commission of Rs 3.62 per litre. When these two elements are added we get a total of Rs 40.70 per litre. On this a state government value added tax of 27% amounts to Rs 10.99 per litre.

This means that the retail price of petrol will be Rs 71.17 per litre (Rs 37.08 dealer price + Rs 19.48 central excise + Rs 3.62 dealer commission + Rs 10.99 state government value added tax). This is Rs 5.26 per litre lower than the current price of petrol (Rs 76.43 - Rs 71.17).

This double taxation can be corrected, by starting to tax petrol and diesel under the GST. How will things look then? The answer is fairly simple. It actually depends on the rate of tax. Currently, the highest rate of tax under GST is 28% (without taking the different cesses into account). What would be the price of petrol, if the current taxing mechanism is done away with, and petrol is taxed under the GST. Take a look at Table 2.

Table 2: Price build-up of Petrol under GST  

	(in Rupees)
Price charged to dealers	37.08
Dealer Commission	3.62
Total	40.70
GST(@28% of Total)	11.40
Retail price of petrol	52.1

Source: Author calculations.

The price of petrol, if taxed at the top GST rate of 28%, would be around Rs 52.1 per litre, significantly lower than the current price of petrol in Delhi. Of course, this would mean that both the state governments as well as the central government would not be able to earn the huge amount of money that they currently earn by taxing petroleum products.

In the above example the GST collected is Rs 11.4 per litre. The GST would be split equally between the state and the central government, at Rs 5.7 per litre each. As we have seen in Table 1, the central government currently earns Rs 19.48 per litre as tax for every litre of petrol that is sold. Their earnings from taxing petrol will fall by more than 70% per litre.

In April 2018, the Press Trust of India, quoted a finance ministry official as saying: "Every rupee cut of excise on fuel will result in a loss of Rs 13,000 crore to the government." In the example taken above, the central government loses Rs 13.78 per litre. This means, the central government taxes from petrol will come down by close to Rs 1,80,000 crore during the course of one year. (Of course, this is not an exact calculation, given that petrol prices will vary through the year. But the larger point here is that any move to GST will cost the central government a lot of money).

The Delhi state government, along with other state governments will also see a significant fall in tax collections from petrol and diesel.

In Table 1, we see that on June 13, 2018, the governments (central and state) will collect Rs 35.73 per litre as tax for every litre of petrol sold in Delhi. If this were to be replaced by a GST of 28%, the collections will come down to Rs 11.40 per litre.

This tells us very clearly that moving to a GST based structure for petrol and diesel pricing, does not make much sense for either the state governments or the central government. For state governments to agree to this move, the central government will have to compensate them for the loss in revenue. Where is this money going to come from?

Of course, the GST Council has an option of introducing a higher rate of tax for petrol and diesel, and then ensure that the revenue collected by the state governments as well as the central government continues to remain the same.

In that case the only thing that will happen is that pricing of petrol and diesel will become more transparent. In fact, in itself that is not a bad thing at all. More transparency in government is always a welcome move.

- Vivek Kaul