Signs that Modi government wants to bring petrol and diesel under GST – and the reasons why it is difficult

• One of the biggest exclusions from the Goods and Services Tax (GST) regime is petroleum.
• At the moment, the Centre levies excise duty while states levy value added tax (VAT) at different rates, leading to different rates of petrol and diesel in different parts of the country.
• This could change if the Modi government manages to bring petroleum under GST.
• It could also make the rates uniform across the country and bring down prices.

The Modi government could be gearing up to bring petroleum under the Goods and Services Tax (GST) regime, at a time when petrol prices have broken all past records and breached the ₹100 mark in several parts of the country.

When it was rolled out in 2017, the GST regime brought a wide range of products and almost all services under its purview, and the latest to join this list could be petroleum – this is an issue that seems simple on the outset but is a lot more complicated than that.

However, the Modi government could be aiming to put this issue behind it if Finance Minister Nirmala Sitharaman’s recent comments are anything to go by.

We look at some signs that suggest the Modi government is pushing for bringing petroleum under the scope of GST.

Exhibit 1 – FM Sitharaman’s recent comments on the surge on fuel prices

In an address to the media recently, Sitharaman said that this is a “vexatious issue” and one that needs to be addressed by both the Centre as well as the states.

“But to get fuel prices under GST needs to be a thorough discussion in the GST Council (comprising Centre and the states),” she said in the address.

Further, commenting on the fact that petrol prices are different in each state, she added, “That anomaly can be addressed if it is under GST. And that can be just one tax which can be shared by both Centre and State.”

Currently, taxes on petroleum products are levied by both the Centre and the states. While the Centre levies excise duty, states levy value added tax (VAT).

If petroleum is brought under GST, both the taxes would be merged and fuel prices across the country would be uniform.

Sitharaman found support from the Reserve Bank of India’s governor, Shaktikanta Das, who urged the Centre and states to reduce taxes on petrol and diesel. This could also be seen as a nudge towards pushing both the sides to bring petrol and diesel under the ambit of GST.

Exhibit 2 – PM Modi says his government is committed to bring natural gas under GST

PM Modi gave a boost to calls for including natural gas under GST. He said, “We are committed to bringing natural gas under the GST regime; I want to tell the world to invest in India's energy sector,” adding that this would help reduce prices as well.

There’s support from the opposition as well

Another shot in the arm for the Modi government is the fact that even the opposition wants petrol and diesel to be brought under GST. The issue has seen comments from former finance minister P Chidambaram questioning the government as to why this has not been done.

Why is it difficult to bring petroleum under GST?

Petroleum products contribute a significant amount of revenue to the states. For instance, VAT on petroleum products is as high as 40% in Maharashtra, contributing over ₹25,000 crore annually.

By being able to levy VAT on these products, the state governments have control over their revenues. Bringing petroleum under GST takes away that control as the Centre is the one in charge of fixing the rate of GST.

Another issue is the rate of VAT on petrol and diesel varies wildly amongst states. While Maharashtra charges up to 40% on petrol, while Andaman and Nicobar charge just 6%.

Levying a standard rate of GST on petrol would mean that the prices increase dramatically in Andaman and Nicobar, but on the flip side, they would fall in Maharashtra if the cumulative rate is lower than the current rate.

This throws up two issues – while the common person would end up paying more for petrol in Andaman and Nicobar, the Maharashtra government would lose out on revenue as GST would lower the effective rate of tax on petrol.

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