The Impact of GST on Petrol and Diesel Prices in India

India's implementation of Goods and Services Tax (GST) has been a topic of much discussion, particularly in relation to the pricing of essential commodities such as petrol and diesel. Many enthusiasts believe that the introduction of GST could lower these fuel prices. However, the reality is more complex and nuanced.

Understanding the Current Tax Structure

Currently, petrol and diesel in India are subject to a combination of Central Excise Duty and State Value Added Tax (VAT). The Central Excise Duty is levied on the production or import of these fuels and is added to the cost. Subsequently, the State VAT is imposed on the excise duty amount. This arrangement creates a cascading effect, where taxes are levied on top of taxes, leading to higher prices.

How GST Could Lower Fuel Prices

The introduction of GST on petrol and diesel is intended to simplify and streamline the tax structure. Under the GST regime, only one tax, GST, will be levied on the fuel. This would remove the Central Excise Duty and State VAT, thereby eliminating the cascading effect. As a result, it is expected that fuel prices would decline, especially when the GST rate is below 28% (the highest applicable rate).

Realities and Challenges

While the theoretical benefits of simplified taxes under GST are attractive, several practical challenges and considerations must be addressed:

Tax Revenue Concerns: The current tax burden on fuel revenues is substantial. Currently, around 65% is collected as taxes. If fuel is brought under GST, the tax burden would be reduced to approximately 28%. This significant reduction would result in a loss of 72% in tax revenue. Neither the Central Government nor the States are prepared to abandon such a significant source of income.

Loss of Revenue: States heavily rely on taxes from oil and fuel as a major source of revenue. The revenue sharing arrangement where the Centre shares 40% of the tax with the States is a long-established practice. If fuel prices drop significantly due to GST, the overall revenue from these sources could diminish, raising concerns about fiscal stability.

Cess and Revenue Neutral Rate: To mitigate potential revenue losses, the government might introduce additional cesses or implement a revenue-neutral rate. This means that while the visible tax on fuel could be reduced, other forms of cesses or additional taxes might be imposed to maintain the same revenue levels. This strategy would ensure that the net impact on government revenue is minimal, but it would complicate the overall tax structure.

Past Trends: Looking at the past seven years, fuel prices often remain stable or are reduced during election campaigns. Once the elections are over, prices tend to increase sharply. This pattern suggests that political motivations play a significant role in fuel pricing, which could complicate the impact of GST.

State Power and Resistance: Several states have shown resistance to giving up their power to tax fuel and liquor. The central government's efforts to bring fuel under GST have faced significant opposition from states, who fear a loss of autonomy and financial loss.

Conclusion

While the implementation of GST has the potential to simplify the tax structure and potentially lower fuel prices in India, the practical challenges and existing revenue structures make it difficult to predict a significant and lasting impact on prices. The introduction of GST may result in a reduction in fuel prices, but the complexity of tax revenues and political dynamics make it unlikely to achieve a transformative change in fuel pricing.