While the Centre is criticised for not cutting excise duty on petroleum products, it is the states which gain more from the rise in their prices
States are reluctant to impose the Goods and Services Tax (GST) on petroleum, even as they are assured of full compensation on revenue loss due to the new indirect taxation system for the first five years.
Five petroleum products - crude oil, petrol, diesel, natural gas and aviation turbine fuel - are out of GST, as of now. While the Centre is criticised for not cutting excise duty on these products, it is the states which gain more from the rise in their prices.
For, the Union’s tax is a specific levy; the states’ is an ad valorem (based on value) one. Some states impose both types, such as Maharashtra.
Beside petroleum, real estate, electricity and alcohol are out of GST. Finance Minister Arun Jaitley has said he thinks real estate would be the easiest of these to bring in.
Former Central Board of Excise and Customs chairman Sumit Dutt Majumder, earlier involved in the consultations between Centre and states on GST, says the latter had argued that they were unsure of the GST collection from petroleum and how it would change.
Hence, they wanted it kept out, as they were getting 50-55 per cent of value-added tax (VAT) revenue from petroleum.
How does this matter if states are assured of full compensation in the event of loss due to GST for the first five years?
M S Mani of consultancy Deloitte says states’ ability to have differential rates would be hit, as GST would mean a uniform one across the country.
“Historically, there has been a wide variation of VAT rates on petroleum products, with some states imposing specific rates in addition to ad valorem rates,” he says.
For instance, Karnataka has 30 per cent sales tax on petrol and 19 per cent on diesel. West Bengal has 25 per cent sales tax on petrol and 17 per cent on diesel.
Maharastra has a mix of VAT and a specific duty on petrol, at 26 per cent and Rs 11 a litre in some parts and 25 per cent and Rs 11 a litre in others.
Experts say petroleum is a lever which states can use to address any sudden shortfall in revenue.
You can increase or decrease the tax, and vehicle owners won’t be going to other states to fill fuel.
Abhishek A Rastogi of Khaitan & Co. says the inclusion of the petroleum products under GST was a subject of dispute from the outset.
And, the exclusion of five petroleum products is a big deviation from the sought objective of GST.
“States have not agreed to include these within the GST regime as there is an apprehension of loss of revenue,” he says.
Adding that the latter are looking beyond the promised first five years.
However, he adds, states should note that even if GST is imposed, part of the revenue collected would come to them, as the proceeds of the new tax have to be shared between Centre and states.