GST on petrol, diesel: A 28% levy plus VAT is the worst concoction for rising fuel prices

A peak tax rate of 28 percent plus states levying ‘some’ amount of local sales tax or Value Added Tax  (VAT) on petrol and diesel is likely to be the tax structure when the two auto fuels are covered under the GST regime, a top government official said . The operative and dreaded word is ‘some’. As the ensuing discussion would show, ‘some’ could ultimately turn out to be ‘substantial’. Be that as it may, he went on to rationalise the mish-mash on the ground that when the Goods and Services Tax (GST) was unveiled in July 2017 it was after all preceded by hectic activity in arriving at revenue neutral rates for goods and services. By the same logic, he said, there was nothing wrong in fixing a revenue neutral rate of tax for petrol and diesel. So what is wrong if the denouement is an unseemly dual tax! Well a lot of things would be wrong. A GST of 28 percent, the peak rate of the present GST regime (ignoring cesses going under the facile description of sin tax) for petrol and diesel already has a hefty state component of 14 percent, i.e. half. The centre currently levies a total of Rs 19.48 per litre of excise duty on petrol and Rs 15.33 per litre on diesel. States thereafter levy Value Added Tax (VAT) the lowest being in Andaman and Nicobar Islands where a 6 per cent sales tax is charged on both the fuel and Mumbai having the dubious honor of by far imposing the highest VAT of 39.12 per cent on petrol. Delhi charges a VAT of 27 percent on petrol and 17.24 percent on diesel. [caption id=“attachment_4527601” align=“alignleft” width=“380”]  Representational image. Reuters[/caption] With VAT varying egregiously and whimsically across the country, fuel prices witness the unseemly spectacle of ups and down when one travels through the length and breadth of the nation. GST’s sales pitch is One Nation One Tax. Therefore, when petroleum products are brought within its ambit, it must live up to this promise—One Nation One Tax and hence one price for the same product or service. But the dark hints are it won’t be. States will go on a rampage if the dual tax regime takes over. States as it is get 42 percent from the central pool. Which means right now out of the specific rate of Rs 19.48 per litre of excise, states get Rs 8.18. Under the GST regime, it would be a pittance—42 percent of 14 percent (central GST) of the price charged from dealers which let us say is Rs 38 per litre i.e. Rs 2.23. The first thing states would do is to make up for this short fall—8.18 less 2.23, i.e. Rs 5.95 from the central pool. They won’t stop at this. In Mumbai for example, the 14 percent state GST levy would give the Maharashtra government just Rs 5.32 which would leave it with a huge deficit. Right now it imposes 39.12 percent or around Rs 61 that includes central excise and dealer commission. This translates into Rs 23.87 thus leaving a deficit of Rs 18.55. Thus the state VAT in Mumbai would be roughly Rs 18.55 plus the shortfall from the central pool post-GST vis-à-vis the pre-GST receipts. One must remember Rs 2.23 per litre from the central pool ensures for all states put together with their individual shares depending upon population and other factors as per the finance commission formula. These are admittedly back-of-the-envelope ballpark figures. But they do give a picture of things to come under the mixed-up regime of indirect taxation envisaged for petroleum products. It is not only the states that would levy  a hefty state VAT shovel into the petroleum products. Even the central government may be tempted to do so given the heavy fall in revenue from fuel once GST kicks in. This it might do it the usual way—through cesses it doesn’t have to share with the states under the constitutional scheme of things. We should not be jumping from the fire to frying pan. The centre, to be sure, might come smelling of roses by letting states to fend for themselves but the nation won’t be better off by this fiscal jugglery. For a wholehearted switch to GST, the government must learn to stop viewing fuel as a milch cow. Alternative sources of revenue must be thought of. GST should not be a half-way house. Complementing and supplementing GST with state taxes would be regressive and hurtling back atavistically into the regime GST is bravely trying to shake off. (The author is a senior columnist and tweets @smurlidharan)