Understanding GST on Petrol: Comprehensive Guide to Potential Impacts and Benefits

Guide to GST on Petrol

Introduction

The Goods and Services Tax (GST) is a comprehensive indirect tax levied on the supply of goods and services in India. It was introduced on July 1, 2017, to replace multiple indirect taxes such as VAT, excise duty, and service tax. However, petrol and other petroleum products are currently excluded from the GST regime, primarily due to the significant revenue they generate for state governments through VAT and for the central government through excise duty.

This guide provides an in-depth look at the implications of including petrol under the GST regime, the current tax structure on petrol, and the potential benefits and challenges of such a move.

Current Tax Structure on Petrol

Components of Taxation

1. Excise Duty: Levied by the Central Government, this is a significant component of the tax structure on petrol.
2. VAT (Value Added Tax): Levied by State Governments, the rate varies from state to state.
3. Dealer Commission: A portion of the price includes the commission given to petrol pump dealers.
4. Other Charges: These can include infrastructure and development cess, among others.

Example Breakdown

To understand the current tax structure, let’s consider an example:

• Base Price of Petrol: INR 40 per litre
• Excise Duty: INR 20 per litre
• Dealer Commission: INR 3 per litre
• VAT: 25% on the total of the base price + excise duty + dealer commission

The final price of petrol can be calculated as follows:

$\text{Final Price}=(\text{Base Price}+\text{Excise Duty}+\text{Dealer Commission})\times (1+\text{VAT Rate})$ $=(40+20+3)\times 1.25$ $=63\times 1.25$ $=78.75\text{ INR per litre}$

GST and Petrol: Potential Scenarios

If petrol were to be brought under the GST regime, several scenarios could play out. Here are two primary scenarios to consider:

Scenario 1: Inclusion Under Standard GST Rates

• Base Price of Petrol: INR 40 per litre
• GST Rate: 28% (assumed highest GST slab for luxury goods)
• Dealer Commission: INR 3 per litre

The final price under GST can be calculated as follows:

$\text{Final Price}=(\text{Base Price}+\text{Dealer Commission})\times (1+\text{GST Rate})$ $=(40+3)\times 1.28$ $=43\times 1.28$ $=55.04\text{ INR per litre}$

In this scenario, the price of petrol would be significantly lower than under the current tax regime.

Scenario 2: Higher GST Slab for Petroleum Products

Given the revenue dependency, the government may opt for a higher GST slab specifically for petroleum products. Assuming a hypothetical higher GST rate of 50%:

• Base Price of Petrol: INR 40 per litre
• GST Rate: 50%
• Dealer Commission: INR 3 per litre

The final price under this higher GST rate can be calculated as:

$\text{Final Price}=(\text{Base Price}+\text{Dealer Commission})\times (1+\text{GST Rate})$ $=(40+3)\times 1.50$ $=43\times 1.50$ $=64.50\text{ INR per litre}$

Benefits of Including Petrol under GST

1. Uniform Taxation: GST would lead to a uniform tax rate across all states, reducing price disparities.
2. Transparency: The GST framework is more transparent than the current multiple tax system.
3. Input Tax Credit: Businesses could avail of input tax credit on petrol, reducing their overall tax burden.
4. Reduction in Cascading Effect: GST would eliminate the cascading effect of multiple taxes on petrol.

Challenges of Including Petrol under GST

1. Revenue Loss for States: States rely heavily on VAT from petroleum products for revenue. Including petrol under GST could lead to significant revenue loss for states.
2. High Initial GST Rate: To offset the revenue loss, the initial GST rate on petrol might be very high, negating some of the benefits.
3. Complex Transition: Transitioning from the current tax system to GST for petrol would be complex and require careful planning and execution.

Conclusion

The inclusion of petrol under the GST regime could bring about significant changes in the pricing and taxation of petroleum products. While it promises benefits like uniform taxation and transparency, it also poses challenges, particularly in terms of revenue loss for states and the complexity of transition. Policymakers need to weigh these factors carefully to determine the most beneficial approach for the economy and consumers.

FAQs

Q1: Why is petrol not included under GST currently? A1: Petrol is not included under GST due to the substantial revenue it generates for state governments through VAT and the central government through excise duty.

Q2: What could be the potential GST rate for petrol if included? A2: While speculative, potential GST rates for petrol could range from 28% to a higher rate like 50%, depending on revenue considerations.

Q3: How would GST on petrol benefit consumers? A3: GST on petrol could lead to lower prices due to the elimination of multiple taxes and the cascading effect, along with improved transparency in the tax structure.

Q4: What challenges do states face with the inclusion of petrol under GST? A4: States may face significant revenue losses as they heavily depend on VAT from petroleum products, requiring them to seek compensation or alternative revenue sources.

By considering the detailed implications and potential outcomes, stakeholders can better understand the complexities involved in bringing petrol under the GST regime.