Tell us about this interesting formula that you have proposed. What happens if petroleum is brought under the ambit of GST?
Taxation of petroleum products is a vexing problem for both the centre and the states. In case of states it is one of the few options that gives them the flexibility to tax in times of unforeseen circumstances and for the Centre also, it serves the same purpose as we saw during the pandemic. It is very difficult to let go of that flexibility of taxes on petroleum products be it for the Centre or the states. Taxing of petrol products is a mixed issue not only in India but globally. Right now, even though we have a GST in the country, the taxation structure is different for 30 states across the country and is different for the centre. So even though GST is one nation one tax, we have more than 30 taxation structures for the states. In Maharashtra, there are two taxation structures — one for Mumbai and one for Navi Mumbai.
Against this background, we thought why not try to find out some sort of a formula which could strike a middle ground for the centre, the states and also the consumers. We did a lot of simulations and found out that based on the current base case scenario at crude prices exchange rate, if petrol and diesel were bought under GST at the highest tax bracket of 28% where the centre gets 14% and the states get 14% but with also a cess on petrol and diesel (with the cess on diesel being lower than that of the petrol), then petrol prices could be at Rs 75 and diesel at Rs 68.
The revenue loss to the centre and the states would be at 0.4% of GDP and the interesting point is that if there is a possibility of revenue loss, we have given the flexibility to the government not to pass on to the consumers the benefit of oil price fall and keep the prices same at Rs 75 or Rs as the case may be. Similarly, in times of distress, if the oil prices go up that could be used to compensate the centre and the states in terms of revenue loss. It remains to be seen what could be an operational flexibility or the thinking in the government.
But why tax petrol and diesel at 28% — the highest slab under GST along with sin goods? Why is something so widely used by all sections of the society directly and indirectly being taxed so highly?
By that logic, the cess that we are proposing of Rs 34 for petrol and Rs 24 for diesel should also be not there. Yes, that 28% tax bracket may be a little bit on the higher side but look into the revenue projections which the centre has proposed for next year — Rs 3.35 lakh crore in excise duty — to mop up from petrol and diesel petrol products. The states numbers are not yet out because all the states have not presented their budget. But our estimate is that this number could be as high as Rs 2.7 lakh crore.
So add Rs 3.35 lakh crore to Rs 2.7 lakh crore and the number could be more than Rs 6 lakh crore. In order to mobilise such an amount of revenue by the centre and states, a lower GST would make for a higher revenue loss. Of course, we are estimating some elasticity and buoyancy in revenue growth because if you cut the prices, there will be volume growth. That also has been taken into account but my sense is that given that the centre and states depend on oil at a source of revenue a great deal, it is very difficult to keep the tax rates below the 28% GST bracket.
Why should states agree to bringing petrol and diesel under the ambit of GST? They have all lost revenues in the pandemic year and a lot of them are heavily dependent on revenues from petrol and diesel.
Demand for getting oil under GST is also to take advantage of the input credit which currently is around Rs 20,000-25,000 crore as per our estimates. We need to mention that if oil is pushed under GST, then this input credit should not be made available. Otherwise, the government could lose even more revenue than we are estimating.
The point to note over here is that the formula is proposing an exact equivalent distribution of the taxation structure between the centre and states even in the case of cess on petrol and diesel and also in the 28% category. That is the crucial assumption which goes over there and the revenue loss is much lower for the states than for the centre. So a little bit move towards equitable distribution of the taxation structure would cut the losses of the states to a significant extent, but could also increase the losses of the centre to some extent.
Ultimately we have to find a middle ground. In this tax structure, some of the states which rely more on oil tax revenue as a source of revenue, like Maharashtra, Rajasthan and Tamil Nadu, stand to lose 3- 4% of the average revenue. But there are some states like Uttar Pradesh which actually stand to gain under the new regime because they do not tax the oil to such a great extent. So, there are both sides to the story. Some states would tend to lose, some large states like Uttar Pradesh and West Bengal would stand to gain but in the ultimate analysis, the idea is let us have an equitable tax structure whereby the losses for the states are lower and goes up a little bit for Centre from the current levels. There will be revenue loss of 0.4% of India’s GDP — around Rs 1 lakh crore, of which Rs 70,000 crore is for the Centre and maybe Rs 30,000 crore for the states.
Right now, this is a hypothetical situation. There are some reports which are saying that the Centre can drop up to Rs 8.5 per litre on excise without losing too much money from its target. Is it time now for the Centre to step forward and let go a bit of those excise tax earnings?
There is a merit in the argument but the only point which I want to make over here is that last year was an exceptional situation for the government and the centre government had no other recourse but to hike excise duties on oil. But this type of excise duty is also not sustainable for a longer period of time.
The good thing is that the crude oil prices have started to move down if they have move down from these level then I think it could have been very problematic on the part of the government but my sense is that the government, the central government has also clearly said that it wants to peg the fiscal deficit at 4.5% in 2025-2026 and for them growth is the utmost priority today.
We are five years away from that 4.5% and our estimate shows that the fiscal deficit for this year could be even lower than 8.7%, but that is a separate point. Why not try to push for GST and oil when the iron is hot? When everybody is talking about growth and fiscal consolidation or fiscal austerity though at this point, it is possibly not one of the priorities of any government across the world. So, nobody will say anything to you if you lose a little bit of revenue but the benefits which will come if you fix the petrol prices and diesel prices at a subtle level could be enormous.
Actually the markets will rejoice. People like us can pay but for the transportation segment and others, it is an input cost. Remember this year the government is borrowing a huge amount from the market. Any pressure on fuel inflation would impact CPI inflation with a lag and that could be detrimental to the interest rate and everybody wants to avoid it. So, why not try to push for this one at this point of time rather than wait for a period when the time may not be opportune?
