In accordance to the Constitution of India, the Goods and Service Tax (GST) can be levied on ‘Petroleum Products’, but it is the GST Council that would decide when such products can be brought under its regime.

In terms of Article 279A (5) of the Constitution of India, “Goods and Service Tax Council shall recommend the date on which the GST be levied on Petroleum Crude, High Speed Diesel, Motor Sprit(commonly known as petrol), Natural Gas and Aviation Turbine Fuel.”

We understand that during initial years of operation of GST, Petroleum Products were proposed to be excluded from the purview of GST for various reasons including that this issue should not be a hurdle in early implementation of GST in our country.

Major Benefit to the Economy

Petroleum Products are the major source of fuel for the industry and excluding the same from GST would add to overall tax cost of production. All industrial fuels should be part of the GST normally as any other product, to reduce the overall cascading of taxes, so as to make Indian products competitive in the international market. If there are revenue considerations, the same can be achieved by restricting the credit to end customers.

Present Effect

Soaring fuel prices have been the talk of the town lately and fairly so. Even a meagre increase in fuel price not only impacts the consumers directly in their day-to-day needs but also has an effect on inflation.

Currently, Petroleum products such as crude oil, natural gas, diesel, petrol and aviation fuel are outside the ambit of GST and they are subject to levy of Central Excise and State specific VAT (Value Added Tax) regulations.

Since, these products are still outside the GST net, there is a loss of ‘input tax credits’ of the amount one pays towards Central Excise and State VAT, as the same cannot be off-set towards output GST. Similarly, GST on inputs/capital goods and input services, becomes a cost for the Petroleum industry, if Petroleum products are brought under GST, then, even with the highest tax slab rate of 28 percent, there would be considerable price reduction.  This drop itself would bring in the first level of respite for the consumers and would also bring uniformity in the fuel taxes imposed across the country.

If one makes an indicative computation of fuel prices under GST (if the Government bring Petroleum products under the highest slab of 28 per cent GST) it will suggest that fuel prices could reduce in the range of atleast 10-20 percent due to saving in taxes, which would have a direct impact on disposable income of any household. It will also allow seamless flow of input tax credit which will indirectly reduce prices of Petroleum products as also other products where Petroleum is a major input.

Even the Aviation Ministry is pushing for inclusion of Aviation Turbine Fuel (ATF) or jet fuel in GST, as higher jet fuel prices are impacting airlines and in turn passengers through rising fares dearly.

Revenue impact

However, bringing Petroleum products under GST (even with the highest slab of 28 percent) would significantly dent the Government’s kitty as the revenue dependency on current tax levy is high. In order to compensate this gap, the Government may also resort to introduction of additional cess on the Petroleum products, which would mean that the ultimate price to consumer may not see a substantial dip, which may be counter-productive.

Fear of the States

States are presently empowered to levy taxes over and above the GST. States get upto 40 percent of their revenue from Petroleum products and if there are losses after bringing them (on par) with the GST, neither the Centre nor the States can absorb such losses.

Dangerous View

Recently, there has been reports of the possibility on combination of both, GST (with highest slab of 28 percent) and local Sales Tax or VAT ( to be levied by the States). But, this may not result in any substantial/ desired reduction in pricing and may also give rise to further complications in taxing structure.

Amendments in the Constitution of India prescribed that Petroleum products can be brought under GST and Excise as well as VAT will continue on them.

There are two possibilities:

  • To bring Petroleum products under the GST in some rate slab and continue with VAT and Excise as well;
  • The Governments do not impose any Excise and VAT, but levy GST with highest slab of 28 percent and then Cess, not for compensation, but to be shared between Centre and States. The Government also have a provision for Additional Excise Duty on Petroleum products.

If the first possibility is fructified then it will result in a tax structure more complicated than what it is now. Besides, if Central Excise & VAT added to GST, then what is the benefit of bringing them (the fuel prices) into GST regime? This system may serve the purpose of manufacturers, as they will get input tax credit, but it will have cascading effect on consumer.

General public/ consumers will benefit only if both Centre and States decide to settle for lower income from petrol and diesel. A stable methodology of bringing in Petroleum products under the GST ambit is the need of the hour.

Mukul Gupta
Senior Partner & Counsel
SHARNAM Legal
Chairman-Indirect Tax Representation Committee
All India Federation of Tax Practitioners.