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Here's why fuel should be brought under GST: Price per litre will drop by Rs 22 in Delhi, Rs 32 in Mumbai

Union Minister and senior BJP leader Nitin Gadkari is known for his pragmatism as much as much as he is loved for his project execution skills. That is why jaws dropped collectively when he made a case for not reducing taxes on petroleum products on the specious ground that it would ground several of the welfare and infrastructure projects of the government. But his colleague, the one who is closer to ground zero, Union Oil Minister Dharmendra Pradhan has not been mincing words. He has been an ardent votary of petroleum products being brought under the Goods and Services Tax (GST) which in his perception would bring down the oil prices to half. Another person equally closer to ground zero, Maharashtra Chief Minister Devendra Fadnavis too has come out openly in support of fuel being brought under the GST so as to provide a lasting solution to the vexed problem of climbing fuel prices for consumers.

The windfall tax proposed on the little oil produced in the country should be thrown out of the nearest window. It is the surest way to kill fresh investments in the oil exploration business the country so badly needs.

It is wrong to ascribe windfall status to the extra revenue earned by domestic producers on the back of rising international prices just as it would be wrong to impose windfall tax on life-saving drugs. Both would drive away fresh investments in crucial areas. To a passerby, if a ripe mango is blown away by the wind and falls on the ground that is windfall but not when international crude price breach the arbitrary figure of $70 per barrel. Be that as it may.

Representational image. Reuters.

Petrol station. Representational image. Reuters.

Bringing petroleum products under GST brooks no delay. All that it requires is convening of the GST Council meeting immediately. To be sure, our GST Council functioning like the World Trade Organisation (WTO) is often stymied by the need for unanimity to pass a resolution. Unanimity is as cruel as its other extreme, veto power. But Finance Minister Piyush Goyal should nevertheless convene the GST Council meeting and dare the Opposition. Let the obstructors and obfuscators be exposed. Petroleum products can no longer be milch cows for the government.

Break-up of petrol prices in Delhi
Elements Unit Before GST After GST
Cost & freight price on moving average basis of crude oil $/barrel 86.61 86.61
Average exchange rate Rs/$ 67.51 67.51
Price charged to dealers (Excluding excise & VAT) Rs/Litre 37.89 37.89
Add: Excise duty Rs/Litre 19.48 0
Add: Dealer commission (average) Rs/Litre 3.63 3.63
Total 61.00 41.52
Add: VAT applicable for Delhi @27% Rs/Litre 16.47 0
Add: GST at peak rate of 28% (assumption) 0.00 11.63
Retail selling price in Delhi Rs/Litre 77.47 53.15

 

Let us see how GST works assuming the peak rate of 28 percent is what mollifies the Opposition besides suiting the central government. At present the Delhi government imposes 27 percent VAT on petrol. The selling price to dealers is Rs 37.89. To this, when excise of Rs 19.48 is added besides dealer commission of Rs 3.63, it makes the petrol bunk price Rs 61 per litre. The 27 percent VAT on this results in a final price of Rs 77.47 per litre to consumers.

Break-up of petrol prices in Mumbai
Elements Unit Before GST After GST
Cost & freight price on moving average basis of crude oil $/barrel 86.61 86.61
Average exchange rate Rs/$ 67.51 67.51
Price charged to dealers (Excluding excise & VAT) Rs/Litre 37.89 37.89
Add: Excise duty Rs/Litre 19.48
Add: Dealer commission (average) Rs/Litre 3.63 3.63
Total 61.00 41.52
Add: VAT applicable for Mumbai @ 39.78% Rs/Litre 24.27
Add: GST at peak rate of 28% (assumption) 0.00 11.63
Retail selling price in Mumbai Rs/Litre 85.27 53.15

 

Dealer price remains the same at Rs 37.89. Add the same dealer commission of Rs 3.63. The petrol bunk price before GST would be Rs 41.52. On this GST of 28 percent would lead to a tax revenue of Rs 11.63, thus making for an affordable consumer price of Rs 53.15.

Thus, the consumer will save Rs 22 in Delhi when fuel is brought under the GST. Likewise, the consumer in Mumbai will save Rs 32 per litre of petrol as current value added tax (VAT) is much higher at 39 percent compared with 28 percent GST.

The GST eschews tax on tax besides reining in states' greed in fixing rates whimsically.

Mumbai and Kolkata consumers would heave a great sigh of relief. Indeed, the whole nation would. One nation one tax and one price would become the reality for this arguably most sensitive item on one’s purchase basket and budget.

If unanimity eludes the Narendra Modi government at the GST Council meeting convened for this purpose, let the bigoted Opposition be exposed soon after they forged an anti-Modi front in Bangalore a few days ago and flaunted it in full view of TV cameras. The next course of action, albeit less desirable, would be for the BJP-ruled states to reduce their own VAT on petroleum products so that the consumer gets to pay the price he would have under the GST regime that alas was not to be due to Opposition intransigence. This would shame the Opposition like nothing else.

The GST is transparent whereas the proposed windfall tax would be convoluted with no back-to-back relationship between the tax and it being passed on to the consumers. There is no guarantee that it would ever be passed on to the consumers. Even if there is a binding guarantee through law, finding wherewithal for its seamless and automatic transmission to consumers is well nigh impossible.

(The writer is a senior columnist and tweets @smurlidharan)


Updated Date: May 26, 2018 11:31 AM

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