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Published: September 27, 2023
Updated: September 27, 2023

GST Inclusion for Petroleum Products Faces Uphill Battle Amid Fiscal Concerns

Petroleum Products Remain Outside GST for Fiscal Stability

In a recent revelation, it appears that petroleum products are unlikely to join the realm of the Goods and Services Tax (GST) anytime soon. Two senior government officials, speaking anonymously, have cited significant fiscal implications as the main roadblock to this move.

Taxation Complexities

Currently, the taxation on petrol and diesel involves a combination of state-levied value- added tax (VAT) and the central government's excise duty. This dual taxation structure results in a tax burden ranging from 35% to 50% on these products, varying from state to state.

Revenue Loss Concerns

Even if the highest GST rate of 28% were applied to petroleum products, both state and central governments would face substantial revenue losses. This financial challenge is a key deterrent to bringing these products under the GST umbrella.

Fiscal Deficit Woes

The second official emphasised that including petrol and diesel in the GST framework could lead to unintended consequences. While consumers might see limited benefits, it could significantly inflate state governments' fiscal deficits, making it a less-than-ideal proposition.

The Quest for Revenue Neutrality

To achieve revenue neutrality, a tax rate of approximately 56% to 60% would be necessary, according to the official. This rate would ensure that states collect a similar amount of revenue as they did through taxes on petroleum products before the GST inclusion.

Potential Industry Impact

Should petroleum products indeed become part of the GST regime, the petrochemical industry, which relies on these products as industrial inputs, stands to benefit significantly. They would become eligible for input credit, potentially stimulating growth.

Industry Push for Inclusion

Industry stakeholders have been advocating for the inclusion of petroleum products under the GST, arguing that it could help reduce inflation and alleviate financial pressure on citizens.

Previous Proposals and Challenges

Past discussions revolved around a proposal to impose the peak GST rate of 28%, in addition to local sales tax or VAT, on petrol and diesel. However, this proposal did not materialize due to the substantial fiscal implications for state governments.

Current Fuel Prices

Fuel prices, particularly for petrol and diesel, have remained unchanged since May 21, 2022, when the central government reduced excise duties. As of September 1, 2023, petrol in New Delhi was priced at ₹96.72 per litre, while diesel stood at ₹89.62 per litre.

Imposition of GST on fuel a challenging proposition

In light of the significant fiscal concerns surrounding the inclusion of petroleum products under GST, it appears that this move remains a challenging proposition. While it could offer benefits to certain industries and consumers, the potential negative impact on state finances poses a substantial obstacle to implementation. The debate over this issue continues, with stakeholders closely monitoring any developments.