Opinion | Congress’s promise on revenue neutral GST for petrol could amount to nothing for consumers

Opinion | Congress’s promise on revenue 

The Congress party in its poll manifesto has promised to overhaul India’s current goods and services tax (GST) classification, vowing to replace it with a simpler system “based on a single, moderate, standard rate of tax on all goods and services”.

GST kicked in from July 1, 2017, but its impact on prices, businesses and government revenues continue to play out in an economy characterised by multiple pain points.

Under the existing GST, all goods and services have been placed broadly under a four slab structure—5, 12, 18 and 28 percent—along with a cess on luxury and demerit goods such as tobacco, pan masala and aerated drinks.

The multiple tax structure has drawn criticism from traders, retailers and business leaders as many feel it will distort the system and go against the “one-nation, one-market” concept.

Its rollout was also accompanied with frequent changes in rules, leading to confusion among businesses, few rounds of rate cuts and changes, complex return filing system accompanied with major technical snags on the reform’s information technology backbone GST Network (GSTN).

In addition, the compliance rate and the monthly revenue collection remained a concern for the government in the first few months of its implementation.

It also turned out to be the economy’s biggest disruptor, with criticism pouring over hasty implementation, hurting especially the small businesses.

The Congress, in its promised “GST 2.0”, has vowed, among other things, to fix the system with a standard single rate that “will be revenue neutral to the current indirect tax revenues of the Central and State Governments and will take note of the potential of GST 2.0 to boost their tax revenues”.

It has also pledged to bring petroleum products, tobacco and liquor within two years.

While it is necessary to fix the design flaws in the current system, the opinion advocating the case for bringing oil products under goods and services tax (GST) needs careful examination.

What’s in it for consumers if petrol and diesel under a “revenue neutral” GST?  More specifically, how true is the inference that GST on petrol and diesel will bring down the two transport fuel’s retail prices? What will be the GST rate on petrol and diesel? Let’s examine each of these.

There is no gainsaying the fact that petrol and diesel are one of the most heavily taxed products in India. For instance, about 45 percent of the price that a consumer pays for a litre of petrol at the pump go as taxes to the Centre and states.

GST, it is argued by some, will help sharply cut taxes in the two transport fuels, lowering prices at retail pumps. This interpretation is predicated on the hypothesis that even if petrol and diesel attract the highest GST rate of 28 percent, it will still be far lower (by about 17 percent) than the current total tax incidence. This, in turn, will sharply bring down retail prices.

Such an inference can be misleading. For one, it disregards the states’, and the Centre’s necessity to maintain “revenue neutrality”. A revenue-neutral rate (RNR) is the tax rate that results in similar tax earnings for the government despite changes in the design or structure of the levies imposed.

One of the primary reasons why GST’s implementation took more than a decade was a lack of consensus on the likely revenue neutral rates on many products.

Successive governments, both at the Centre and states, have used petroleum products as milch cows.

In 2017-18, the Centre earned Rs 2.29 lakh crore from central excise duty on petroleum products, which is about 11 percent of the Centre’s total gross tax revenues of Rs 19.46 lakh crore earned during the year. Of course, a part of this was shared with states as part of an agreed devolution formula.

Likewise, states earn significant revenues from taxing petroleum products. This is particularly true for the richer or the so-called industrialised states such as Karnataka and Maharashtra.

In 2017-18, Karnataka, which levies a state value-added tax (VAT) of 30.28 percent on petrol and 20.23 percent on diesel, earned Rs 13,307 crore from taxes on petroleum products. This accounted for 14.5 percent of the states’ total tax revenues of Rs 91,718 crore, or for every Rs 100 that the Karnataka government earned in 2017-18, Rs 14.5 came from petroleum products alone.

Similarly, for Maharashtra. The state levies close 40 percent as VAT on petrol and about 25 percent in diesel, earned Rs 25,611 crore from taxes on petroleum products in 2017-18, which translated into 15 percent of the state’s total tax revenues of Rs 164,979 crore during the year.

The pattern is more or less similar across most states, illustrating how a disproportionately high amount of tax revenue is coming from just one set of products, both for the Centre and the states.

Given this historical peculiarity, states are unlikely to settle on a GST rate that would be lower than the revenue neutral rate. What could be the possible revenue neutral GST rate for petrol and diesel? It would probably be in the range of 40-45 percent. Will a GST rate of 40-45 percent on the two fuels bring down their retail prices? Unlikely, because in the final analysis, the tax component in pump gate prices remains the same.

The high tax structure in petroleum pricing is a painful legacy issue in a rather flawed design of India’s energy economics. States are unlikely to let go of their fiscal powers to tax petrol and diesel, and also settle for lower revenues. The Centre could also end up losing substantial earnings, and may have look at other sources to reimburse states for their revenue loss.

At 40-45 percent, GST has nothing for the consumer. At best, it will help tidying up the system by subsuming a welter of local and central levies into a combined tax.

A lower GST on fuel will have to come bundled with higher rates on some other products and services. One possible option could be to significantly hike the tax rates or cess for luxury, demerit and `sin’ goods. It will help offset revenue losses for the states and the Centre, fix a lower GST for petrol and diesel and also lower pump gate prices.

After all, not many would mind GST at 28 percent for fuel, at the cost of higher tobacco prices. It will make tanking up cheaper, even if smoking becomes dearer.

Will states agree to a lower GST rate on petrol and diesel, without being assured of other avenues to offset the revenue loss by forgoing VAT on fuels?