Will petroleum products come under GST in 2022? Centre should turn tricky issue into 'win-win' situation

New Delhi, Dec 16: Petrol and diesel prices witnessed historic highs in 2021 amid the growing demand for bringing petroleum products under the GST. The Centre too claimed that it was open for discussion on the issue, but people's hopes on bringing the fuels under the ambit of GST crushed as the GST council, in the meeting held in September, said that it was not the "right time" to include the fuel in GST.

In 2021, the petrol price crossed the Rs 100-crore mark across the country and diesel too was sold over Rs 100 crore in several states. Hence, there was a huge expectation from the public that the Centre would finally bring the fuel within the GST. With major elections scheduled to be held in the next few months, many expected the BJP to take a bold decision, but no such decision was taken.

Why it is a Tricky Situation for Centre to Bring Petroleum Products within GST?

The major source of revenue comes from petrol and diesel for the Centre and state governments. State levies and central excise duty account for more than half of the retail selling prices of petrol and diesel. For instance, taxes make up for 60 per cent of the retail price of petrol and diesel. Excise duty constitutes 36 per cent of the retail price.

As a result, the government showed no interest to reduce the price even when the international crude oil prices had dropped. The Centre had said that higher taxes compensate for the loss of other revenues after the economy was hit by the pandemic.

Retail Price and Taxes Levied

Retail prices of fuel are decided after adding central excise, commission paid to dealers and VAT to basic oil prices. Basic oil prices consist of International benchmark crude oil prices plus freight rates.

Prior to the duty cuts on November 1, central excise of Rs 32.90 a litre and VAT of 30 per cent in Delhi made up for 54 per cent of the retail selling price of diesel, according to price build-up of the fuel available from state-owned fuel retailers. This, after the Rs 5 per litre reduction in excise duty, came down to 50 per cent in Delhi, as per a PTI report.

Before the rate cuts, basic price, which included the cost of oil plus freight, varied between Rs 52.01 a litre in Chennai to Rs 59.89 in Ladakh. On top of this, the central government charged an excise duty of Rs 27.90 which was paid at the factory gate (the refinery in this case). Thereafter, the state governments levied different rates of local sales tax or VAT.

For example, VAT on petrol was highest in Rajasthan at Rs 30.51 per litre followed by Maharashtra which charged Rs 29.90 VAT, Andhra Pradesh levied Rs 29.02 VAT, Madhya Pradesh Rs 26.87 till the new rates came into effect. The lowest VAT was levied by Andaman & Nicobar at Rs 4.93 per litre, a PTI report claimed.

If the fuels are brought under the highest tax slab of 28 per cent in the GST, the centre and state governments would suffer big losses as it is taxed more than 100 per cent. Further, it will be a major blow to the state government as the states have only petroleum and liquor as their independent sources of taxes. Taxes on rest of the products and services would go to the Central government that would dole out the states' share.

If petroleum products are brought within GST, states should further depend on the Centre to receive their shares of the taxes. Hence, many state governments are opposing the idea of bringing fuels under the ambit of GST.

However, there is also an argument saying that the reduction in the taxes will lead to higher consumption of fuels and people would have enough money to spend which will boost economic growth.

Nonetheless, people are hoping that petrol and diesel would be finally brought under the ambit of GST in 2022.

Can the Centre handle the tricky situation to make it a win-win situation for the government and consumers? Time will answer.