The Indian taxation landscape has long grappled with the complexities surrounding the taxation of petroleum products, including the ubiquitous petrol and diesel. Amidst calls for simplification, transparency, and efficiency in the tax system, the proposal to bring these fuels under the Goods and Services Tax or GST regime has emerged as a potential solution. This move, while holding the promise of streamlining the tax structure and providing a more coherent framework, also presents a spectrum of socio-legal insights, and challenges that must be deftly navigated.
How is Fuel currently taxed?
Based on recent research, the retail fuel prices have reached their highest point ever. As of August 10, 2023, the cost of Petrol in Chennai, Delhi, and Mumbai stands at Rs 102.63, Rs 96.72, and Rs 111.35 per liter respectively. The pricing for diesel in these cities is Rs 94.33, Rs 89.62, and Rs 94.27 rupees per liter correspondingly. The difference between the pricing in different cities is due to the tax levied on them by the relevant states.
These prices are influenced by global crude oil prices, and they are revised daily by the Public Sector Oil Marketing Companies (OMCs) based on the changing global oil rates. However, the final retail price we pay at the pump is a combination of various components, including the base price set by OMCs and taxes imposed by both the central and state governments.
Dealers are businesses that purchase the fuel from the OMCs and deliver it to the consumers at the gas stations. The price charged to such dealers consists of the base price set by OMCs and the freight cost associated with transporting the fuel. This base price varies based on international crude oil prices and other market factors. The dealers then factor in their operational cost and profit margin with the taxes levied to make up the final retail price.
The final retail price can be noted to be heavily influenced by the central and state taxes. The breakdown of retail costs for petrol and diesel in Delhi (as of October 16, 2021) indicates that approximately 54% of the total petrol price is made up of taxes imposed by both the central and state governments. For diesel, this tax component is close to 49%. The central government levies taxes on the production of petroleum products, whereas states impose taxes when these products are sold. As of May, 20221, the Central Government imposes an excise duty amounting to Rs 19.90 per litre on petrol and Rs 15.80 per litre on diesel. The central duties constitute 20% and 17.6% of the current retail prices of petrol and diesel, respectively.
While the rates of excise duty remain consistent throughout the country, the states impose different levels of sales tax or Value Added Tax (VAT). For instance, Odisha enforces a VAT of 32% on petrol, whereas Uttar Pradesh imposes a VAT of Rs 18.74 per liter. Some states such as Tamil Nadu also levy an additional tax called the ‘cess’. It should be noted that VAT is an ad valorem tax, in essence, not a fixed tax. It is calculated as a percentage of the product’s price. Consequently, while the excise duty remains constant, the value of the sales tax varies based on the three other factors or components: the price set for the dealers, the dealer’s commissions, and the excise duty. This also means that the tax fluctuates based on the market price of the fuel.
As it has been discussed earlier, states are free to shape their own tax collection model on fuels. Consequent to such flexibility, there is extreme volatility in tax collection. Many states have adopted a hybrid structure wherein the VAT is charged at a lower rate on the fuel but a flat charge per liter is applied on petrol and fuel. This includes state of Maharashtra, Andhra Pradesh and Tamil Nadu. Various other states and union territories have applied other innovative taxes such as employment cess, road development cess and pollution sub charge, etc. Cess refers to an additional tax imposed on top of the basic tax liability, and it is implemented for specific purposes.
The current system of taxation on fuels, characterized by a labyrinth of excise duty and state-specific taxes, adds unnecessary complexity for businesses and consumers. Undeniably, the cascading taxes (taxes on top of taxes) has created an environment ripe for the proliferation of frustrations during price hikes. There is a dire need of transparency and a uniform system for economic and social stability. Theorists argue that bringing petroleum products under the GST regime is the solution.
Should Petrol, Diesel and other Fuels be brought under GST Regime?
The inclusion of fuels like petrol and diesel into the Goods and Services Tax (GST) regime presents a great scope for streamlining India’s taxation landscape. This transition requires not only constitutional amendments but also changes to existing laws such as the Central Goods and Services Tax Act, 2017, and State Goods and Services Tax Acts. The scope extends beyond tax rate adjustments; it involves redefining definitions, addressing valuation complexities, and establishing uniformity across the country. This transformation calls for collaboration between the central and state governments to ensure a coherent and harmonized GST framework for fuels.
Furthermore, the socio-legal landscape emphasizes the importance of public perception. Transparent communication elucidating potential benefits, such as streamlined pricing and reduced complexity, is pivotal to managing public expectations. Concurrently, the direct correlation between fuel prices and inflation calls for necessary innovation. The fluctuating fuel costs reverberates through various economic sectors, influencing transportation, production, and essential commodities.
Incorporating fuels into the GST regime isn’t merely a legal shift; it’s a delicate balance between constitutional provisions, public perception, and economic stability. By navigating through these challenges, India can achieve a successful and harmonious integration of fuels into the GST landscape.
The Benefits of including Fuels under the GST Regime
The Consumer’s Benefit: A boon to the Public’s Wallet
Incorporating petrol and similar products into the GST framework would potentially benefit consumers. Presently, taxes constitute around 40-50% of the total petrol price paid by consumers. However, under the GST structure, the maximum tax burden would be capped at 40% (20% for both State GST and Central GST).
Even if commodities like petroleum crude, high-speed diesel, motor spirit (commonly referred to as petrol), natural gas, and aviation turbine fuel were subjected to the existing maximum GST rate of 28%, consumers might still end up paying a reduced price compared to the current rates. Transitioning to the GST model could lead to a significant decrease in prices.
Uniform Taxation: Taming the Complexity
One of the key benefits of integrating fuels into the GST regime is the establishment of a uniform taxation system. The current system of taxation is a clutter of excise duties and state specific taxes which are subject to own discretion of the state government. This results in extreme discrepancies in pricing across state borders. Consequently, making it incomprehensible to the consumers and the businesses involved. Including fuels in GST would simplify tax compliance and make the tax system more transparent.
Elimination of Cascading Taxes: A Step Towards Efficiency
Currently, the petroleum products are heavily levied with different central and multiple taxes from the state. By adopting GST for fuels, the cascading effect of taxes (tax on tax) can be minimized. This would lead to greater efficiency in the tax structure and potentially result in reduced prices for consumers.
Transparency in Pricing: A Breath of Fresh Air
Bringing fuels under GST could provide consumers with a clearer understanding of the tax component in fuel prices. Currently, the taxation is perplexing to the general masses due to its complex nature. Bringing fuels under the GST system would make it straightforward to the consumers. Transparent pricing could help manage public expectations and reduce frustrations during price hikes.
Ease of Doing Business: Unburdening Enterprises
The introduction of a standardized tax system could enhance the ease of doing business in the petroleum sector. Companies dealing with fuels would benefit from simplified tax procedures and reduced administrative burdens. Consequently, widening the scope for economic growth in India.
Challenges and Concerns
Revenue Implications: The States’ Quandary
The states currently derive significant revenue from the taxes on petroleum products. Shifting to the GST framework could potentially disrupt their revenue streams. When introducing such system, it is necessary to plan with careful consideration of such challenge and come up with a possible compensation mechanism.
Determining Tax Rates: The Delicate Balance
Striking the right balance in determining GST rates for fuels is critical due to its far-reaching consequences. If the GST rate is set too high, it can result in inflationary pressures throughout the economy. On the other hand, if the rate is set too low, it could impact the government’s ability to collect the necessary revenue for funding essential services and programs.
The challenge lies in striking a balance that ensures a reasonable GST rate. This rate should be high enough to contribute to the government’s revenue needs without unduly burdening consumers and businesses. Simultaneously, it should be low enough to prevent runaway inflation and safeguard the affordability of essential goods and services.
Administrative Overhaul: The Backbone of Implementation
The transition to implementing the Goods and Services Tax (GST) for fuels is not nominal. It involves a substantial transformation of the current administrative processes and systems, which can be both resource-intensive and complex.
The current tax system for fuels involves various layers of taxes imposed by both the central and state governments. Integrating fuels into the GST regime would demand redefining how taxes are collected, processed, and distributed. This means a complete revamp of the existing administrative infrastructure, including software, databases, and reporting mechanisms would be necessary. New software systems would need to be developed and integrated across various government bodies and departments to ensure seamless tax collection, reporting, and distribution. The government officials and the employees under them responsible for tax administration would need to be trained in the correspondence to the new system.
Impact on Consumers: A Pocket-Sensitive Reality
Fuel prices have a direct impact on the common person’s budget. Even though bringing in GST in the petroleum sector might simplify taxes, global factors like fluctuations in international crude oil prices and exchange rates can still lead to changes in fuel costs. Despite GST implementation, consumers might also still face the brunt of price instability due to frequent GST rate changes because of changing economic conditions. These factors can contribute to price volatility.
Political Consensus: The Puzzle of Agreement
Implementing the Goods and Services Tax (GST) on fuels is a complex undertaking that involves bringing together various states and political stakeholders onto the same page. Achieving such consensus is essential for a smooth transition, but it’s not without its challenges, particularly when it comes to differences in revenue sharing and control.
States currently derive significant revenue from taxes on petroleum products. Transitioning to GST could disrupt these revenue streams, leading to concerns about financial sustainability and maintaining adequate funds for state-level initiatives. States are protective of their autonomy and control over taxation and revenue generation. Any change that impacts this autonomy can lead to debates and disagreements. It can therefore be concluded that a discussion about the implementation of GST system on fuels would undeniably strike a conflict between two bodies of power, the Central and the State government. There would be a civil struggle to gain a greater share of revenue or control.
Navigating Legal Waters: Constitutional Implications and Legal Changes for Fuel GST
Constitutional Considerations: The Legal Framework
The transition of bringing fuels under the Goods and Services Tax (GST) umbrella does not end as just an administrative decision; it’s rooted in legal and constitutional frameworks behind implementing it. The Constitution has provisions regarding allocation of taxation powers between the central and the state government. Changes in the taxation system must adhere to such reservations. Understanding the legal nuances and constitutional provisions is crucial for a smooth and legally sound implementation.
The Article 246 of the Indian Constitution outlines the distribution of legislative powers between the central government and state governments. It divides subjects into three lists: the Union List, the State List, and the Concurrent List. Taxes on goods fall under the Concurrent List, meaning both the central and state governments can levy taxes on them. Article 269A introduces the concept of GST in the Indian Constitution. It provides the framework for the levy and collection of GST on inter-state supplies. In other words, when goods or services move from one state to another. Article 279A establishes the Goods and Services Tax Council to facilitate cooperation between the central and state governments in matters related to GST.
Legal Framework: A Legal Metamorphosis
Initially, the Constitution was amended to allow for GST through the 101st Constitutional Amendment Act, 2016. However, this amendment excluded petroleum and petroleum products from the GST’s scope. For bringing fuels under the purview of GST, another constitutional amendment is required for inclusion.
However, it is important to note that incorporating fuels into the Goods and Services Tax (GST) regime involves not only constitutional amendments but also changes to existing laws at both the central and state levels. Apart from constitutional amendments, changes to existing laws, like the Central Goods and Services Tax Act, 2017, and State Goods and Services Tax Acts, would be necessary.
Central Goods and Services Tax Act, 2017 (CGST Act) governs the levy and collection of GST at the central level. Similar to the CGST Act, individual states have their own State Goods and Services Tax Acts. These laws govern the levy and collection of GST within their respective states. Amendments would be needed in these acts to incorporate fuels into the GST structure. Necessary Amendments must be made to specific chapters or sections dealing with the definition of goods and services, rates, exemptions, and valuation to accommodate fuels.
Firstly, the definitions of goods and services within the CGST Act and State GST Acts might need to be broadened to encompass fuels like petrol and diesel. This change ensures that fuels are properly categorized under the GST framework. Secondly, amendments would be necessary to include specific tax rates for fuels and any applicable exemptions. This ensures that the taxation of fuels is in line with the broader GST structure. Lastly, valuation rules must comprehensibly determine how the value of fuels is to be calculated for tax purposes to suit the unique characteristics of fuels.
Clear and well-drafted legal amendments are essential to prevent any ambiguity or legal disputes in the future. The language of the amendments needs to be precise and comprehensive to cover all aspects related to the inclusion of fuels in the GST regime.
Navigating Public Perception: Communicating Fuel Pricing and Taxation Changes
Public Perception: Communicating the Shift
In the realm of policy implementation, public perception serves as a cornerstone for success. When it comes to integrating fuels like petrol and diesel into the Goods and Services Tax (GST) framework, effective communication becomes a non-negotiable. Clear and transparent communication concerning the advantages and the reasoning behind this transition is important in skillfully managing public expectations. As fuel prices directly impact daily life, people are attuned to even the slightest fluctuations. By disseminating accurate information about the rationale behind this shift, the government can help manage public expectations.
Smooth transition: A managed shift
Effectively conveying the benefits of integrating fuels like petrol and diesel into the Goods and Services Tax (GST) framework is essential for public understanding and support. Clear messaging, visual aids, and relatable examples can simplify complex concepts and showcase how the change simplifies taxation, reduces complexities, and enhances transparency in fuel pricing. Leveraging expert opinions, organizing public seminars, and utilizing interactive platforms allow for comprehensive explanations and open dialogues. Feedback mechanisms and involving public figures further establish a sense of inclusivity and credibility. By consistently and transparently communicating these advantages, the government can create a shared understanding and garner public backing for the proposed transition.
Conclusion
The integration of petrol, diesel, and other fuels into the GST regime embodies a pivotal decision that could reshape India’s taxation landscape. While the potential benefits of a streamlined, transparent tax system are enticing, the journey is fraught with challenges. Balancing state revenues, determining optimal tax rates, and addressing consumer concerns are intricate tasks that demand thoughtful deliberation. A phased approach, bolstered by clear legal frameworks, active stakeholder consultations, and a gradual implementation strategy, holds the potential to pave the way for a more equitable, transparent, and efficient taxation system that benefits all stakeholders involved.
Submitted by Suhani Kataria, 01st Year, B.A.LL.B., Techno-India University, Kolkata.