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Why Imposing GST on Fuel Won’t Lower Your Monthly Expenses?

10 July 20246 mins read by Angel One
Despite the potential benefits, bringing fuel under GST in India may not lower prices due to high revenue dependencies and varying state taxes. Read on to learn more about the GST on fuel breakdown.
Why Imposing GST on Fuel Won’t Lower Your Monthly Expenses?
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Fuel prices in India have long been a topic of heated debate and concern. High taxes on petrol and diesel significantly impact the overall cost of living and economic activities, making it a crucial issue for both consumers and businesses.

One proposed solution to reduce fuel costs has been to bring petrol and diesel under the ambit of the Goods and Services Tax (GST). However, despite the apparent simplicity and appeal of this solution, there are several reasons why GST may not necessarily make fuel cheaper. Let’s break down the complexities surrounding this issue.

The Current Tax Structure on Fuel

Before the introduction of GST in 2017, India’s tax system was highly fragmented, with both central and state governments imposing various taxes on goods and services. The implementation of GST aimed to simplify this by replacing multiple taxes with a single, unified tax structure. However, crucial items such as petrol, diesel, alcohol, and electricity were kept out of the GST regime to protect state revenues.

Fuel is subject to both central excise duty and state VAT (Value Added Tax). The central government’s tax is uniform across the country, while state taxes vary, leading to different fuel prices in different states. On average, taxes constitute about 40% of the retail price of fuel. For instance, if diesel costs ₹100 per litre, approximately ₹60 is the base price, and the remaining ₹40 is tax.

Let’s take an example of petrol prices in Bengaluru:

In Bengaluru, both the Central Government and the State Government levy taxes on petrol. Recently, on June 15, 2024, the Karnataka State Government increased the VAT (Value Added Tax) on petrol from 25.92% to 29.84%. Below is a detailed breakdown of the tax components and other parameters involved in determining the petrol price in Bengaluru as of July 8, 2024.

Details Price per litre
Price charged to dealers ₹55.82
Average commission of dealer ₹3.5
Excise duty (levied by Centre) ₹19.90
VAT (levied by State) ₹24.08 (29.84% of the combined price of fuel charged by dealers, average commission, and excise duty)
Retail selling price ₹102.86

The taxes alone contribute to ₹43.98, which is around 42.75% of the total price per litre of petrol. But why are such high taxes levied on petrol? Let’s find out!

The Economic Rationale for High Fuel Taxes

Fuel taxes are a significant source of revenue for both central and state governments. They contribute between 11% and 17% of total state revenues and are crucial for funding various social programs and infrastructural projects. In the fiscal year 2023-24, fuel taxes were projected to generate ~₹3.18 lakh crore for the states and ₹3.5 lakh crore for the centre, which is 12.9% of the centre’s total FY 23-24 receipts.

Given this heavy reliance on fuel taxes, reducing them without a corresponding alternative revenue source could lead to budgetary deficits. Therefore, central and state governments are cautious about bringing fuel under GST, which might reduce tax revenues.

The GST Dillemma 

GST is designed to be a comprehensive tax levied on the manufacture, sale, and consumption of goods and services at a national level. The highest GST slab is 28%, significantly lower than the combined central and state taxes on fuel, which often exceed 100%.

If fuel were brought under GST, the rate required to maintain current revenue levels would have to be exorbitantly high, negating any potential benefits. Let’s understand with the help of example:

Particulars Amount (₹) per litre
Expected Petrol Price in Bengaluru (Under GST)
A. Fuel cost (Petrol) (Including freight) 55.82
B. Dealer commission per litre (Average) 3.5
C. Total value (A+B) 59.32
GST (assumed highest slab of 28% on C) 16.60
Retail price of petrol (RSP) 75.92

While GST has streamlined many aspects of India’s tax system, applying it to fuel could lead to unintended consequences. If the government sets a high GST rate to compensate for the revenue loss, it could increase the tax burden on other goods and services, raising overall living costs. Additionally, the complex transition might lead to temporary disruptions in the fuel supply chain, affecting prices and availability.

State Autonomy and Revenue Dependency

States enjoy the autonomy to set their VAT rates on fuel, providing them with a direct and substantial revenue stream. Bringing fuel under GST would centralise this tax revenue, making states more dependent on the central government for their share of taxes. This dependency could undermine the fiscal federalism principles and reduce states’ financial autonomy, making them wary of such a change.

Globally, fuel prices are influenced by several factors, including international crude oil prices, exchange rates, and geopolitical stability. India imports over 80% of its crude oil, making domestic fuel prices highly susceptible to global market fluctuations. Even if GST were implemented for fuel, these external factors would continue to play a significant role in determining fuel prices, limiting the impact of any domestic tax changes.

The Way Forward

Given the complexities and potential drawbacks, it is not clear that fuel will be brought under GST in the near future. Both the central and state governments would need to ensure that any shift does not lead to revenue loss or increased financial dependency. Until then, consumers may have to contend with the current tax regime and the associated high fuel prices.

To address the issue of high fuel prices more effectively, governments could explore alternative measures such as:

  • Rationalising existing taxes: Gradually reducing excise duty and VAT calibrated to lower fuel prices without significantly impacting revenue.
  • Diversifying revenue sources: Identifying and developing new revenue streams to reduce dependency on fuel taxes.
  • Improving fuel efficiency: Encouraging the use of more fuel-efficient vehicles and promoting alternative energy sources to reduce overall fuel consumption.
  • Strengthening public transport: Investing in robust public transportation systems to reduce reliance on personal vehicles and fuel consumption.

Wrapping Up

While GST has simplified India’s tax landscape, bringing petrol and diesel under its ambit may not be the panacea for high fuel prices that many hope for. The substantial revenue generated from fuel taxes, the varying rates across states, and the global factors influencing crude oil prices all contribute to the complexity of this issue.

As such, any move to include fuel under GST must be carefully evaluated to balance the interests of consumers, businesses, and governments. Until a viable solution is found, the current fuel tax structure is likely to remain in place, continuing to influence India’s economic landscape.

Disclaimer: This article has been written for educational purposes only. The securities quoted are only examples and not recommendations.

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