Why GST may not make fuel cheaper

In today’s Finshots, we tell you why bringing petroleum products under GST (Goods and Services Tax) may not be a practical solution to bring down high fuel prices.

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The Story

Raman runs a long haul taxi service for a living. He lives in Narayanpet, a small town in Telangana, which is quite close to the Karnataka border.

And every time he gets booked for a trip to a city or town in Karnataka, he makes sure that he fills his fuel tank to the brim on his way back.

That’s because fuel prices in Karnataka are a little bit cheaper than those in Telangana. For context, Raman saves at least ₹6 per litre on diesel when he refuels from a fuel station in Karnataka. Petrol too is at least ₹4 cheaper. So many people like Raman refuel their vehicles from fuel stations in Karnataka whenever they can.

But this isn’t something that fuel dealers like. Because dealers earn a commission on every litre of fuel they sell. So whenever customers go in search of cheaper fuel to other states, they lose out on a lot of revenue. It hurts their prospects as you can see.

And that’s exactly why they’ve been asking the central government to bring petrol and diesel under the ambit of GST (Goods and Services Tax). But it’s not just fuel stations who are advocating for this change. Most consumers seem to want this too. At least that’s what a LocalCircles survey from 2021 suggests. They look at it as a way to reduce the burden of rising household costs.

But is GST really the magic bullet that will lower fuel costs?

Well, to understand that let’s first give you some context about why GST doesn’t cover fuel despite being implemented 7 years ago.

Before GST was introduced, India had a complex tax system where both the central government and state governments charged different types of taxes on goods and services. This meant that when goods were manufactured and sold, they were taxed multiple times at different rates, and every time they crossed into a different state, they were taxed again. This made things complicated and often more expensive.

GST simplified this by creating a single tax that replaced many others like sales tax, service tax, excise duty, and others. Plus, because GST is uniform across the country, it removes the tax barriers between states, making it easier and cheaper to sell goods across different parts of India.

While this simplified things for businesses, it became quite a burden for states. That’s because GST revenues had to be shared between the center and the state. The concept of a separate central and state tax disappeared. And states lost a significant portion of revenue.

So the central government said “Hey we’ll keep items like alcohol, fuel and electricity outside the GST ambit for now. So just focus on finding other avenues to shore up your tax revenues. Meanwhile, we’ll create a fund by slapping some extra taxes on stuff like pan masala, cigarettes or carbonated drinks. So if you still fall short, we’ll share a portion of those extra tax revenues with you until 2026.”

States agreed and things haven’t changed ever since. Fuel still forms a significant part of the revenues states earn. Anything between 11-17% of their total tax revenue to be precise.

And guess what? Close to 40% of the price you pay for fuel is actually different kinds of taxes. The centre charges its own tax which stays uniform across the country. And different states charge different rates of taxes over and above the central tax, which is actually why fuel prices vary across states.

This simply means that if fuel costs ₹100 on average, then dealers buy fuel from oil marketing companies at ₹60 and you pay ₹40 as taxes on it. If you do the math, that’s a whopping 67% tax (or ₹40/₹60) on the basic cost of fuel itself. And bringing fuel under the wings of GST simply means that governments would have to add an atrocious amount of GST to keep earning the revenues they’ve been earning earlier. It’s something even the highest rate of GST at 28% cannot make up for.

In fact, a GST of 28% would mean a significant loss of revenue and would prompt them to raise taxes on other goods and services, pushing up the cost of living for the common folk even more.

So yeah, while GST has streamlined many aspects of India's tax system, applying it to fuel might not magically make fuel cheaper due to the substantial revenue it generates for both state and central governments. Aligning fuel under GST could lead to a major reshuffling of tax burdens across different sectors, affecting everything from state revenues to the everyday expenses of ordinary citizens. So we'll only have to wait and see if the central government has a magic bullet to bring fuel under GST while also shoring up revenues for both itself and the state.

Until then...

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