Fuel under GST: Fears of revenue hit exaggerated

It is commonly known that our dependence on oil imports is very high, which makes India vulnerable to changes in crude oil prices. In March 2022, the price of the Indian basket peaked at $112.87 per barrel, and further declined to $79 at the end of April 2023. Currently, crude oil and petroleum products (including diesel, gasoline, aviation turbine fuel and natural gas) are excluded. Under the ambit of GST; The center and states levy excise duty and VAT on it respectively. Oil is a major source of revenue for the government, with excise and customs duties on it accounting for 29% of the Centre’s total indirect tax collections. Meanwhile, states earn an average of 13% of their own tax revenue from sales tax/VAT on these hydrocarbon products.

States in India have their own tax structure, each levying a combination of ad valorem tax, cess, additional VAT/surcharge based on their requirements. These taxes are levied after considering the cost of crude oil, transportation charges, dealer commission and flat excise duty imposed by the Centre. Multiple taxes have made petroleum and oil product prices in India among the highest in the world. Since the price of crude oil is considered by states, this often means international spikes, which contribute to higher inflation.

We can adopt a simple structure for oil pricing under which our domestic petrol price is linked to crude oil (Indian basket) in such a way that it retails at a Re 1 figure. 5-6 per liter more than the cost of crude oil (in dollars per barrel), while diesel can be kept at par with crude oil. For example, if the price of crude oil is $80 per barrel, then our uniform petrol price would be 85-86 per litre. Also we can keep a cap of 100 per liter on petrol prices of Rs. Meanwhile, diesel prices may be pegged 5-6 less than petrol prices. This can be done by the government by adjusting the amount of cess on diesel and petrol.

Accordingly, we propose a simplified model for bringing oil under GST. We consider a GST rate of 28% for the highest bracket (Centre: 14%, State: 14%). In addition, we levy a flat cess of 24 more for petrol 16 for diesel, with an equal split between the Center and the states. Other views Indian-basket crude averages at $85 a barrel, US dollar 84 and present Transport and Dealer Commission. We used the 2023-24 consumption projections of the Petroleum Planning and Analysis Cell of the oil ministry and applied proportional shares for different states.

Our calculations show that if crude oil averaged $85, the total revenue lost by moving oil to GST would be 1.3 trillion ( 71,000 crores for the Center and 61,000 crore for the states). But if the price of oil drops to $70, the losses will increase proportionally. Given our base case with crude oil at $85, the estimated gasoline price is 91 ltr and diesel 86 per litre. This indicates that the price of petrol may fall further. 15 per liter and by diesel 8 per litre, for example, in Mumbai.

If we look at 10 major states of India, the difference between GST revenue from oil and VAT revenue calculated in 2023-24 (based on the share of total sales tax/VAT collected from these products in 2021-22) shows that the revenue shortfall would vary between 300 crores and 11,000 crores for these states, some states like Haryana and Karnataka also benefited from shifting oil to the GST regime.

However, the revenue losses can also be huge. For example, in 2022-23, the GST collection estimates for the Center were revised upwards 74,000 crore from the budget estimate; Accordingly, the States also revised their CGST estimates to approx. 27,000 crores. Meanwhile, the monthly average GST collection has increased from 1.2 trillion in 2021-22 1.5 trillion in 2022-23. Estimated loss in this type of revenue 1.3 trillion in the base case scenario could be significantly outpaced by the revenue buoyancy under GST. If the monthly GST collection in 2023-24 increases further by approx. 1.75-1.8 trillion due to better compliance, it is likely to compensate states for revenue loss due to changes in GST.

Our analysis clearly shows that the potential loss from bringing oil under GST is overstated. Also, some loss in revenue will be offset by an increase in consumption due to lower prices. The only thing the states will lose is their power to decide VAT rates on fuel separately. Once we shift oil to GST, we will also face the issue of adjustment of input tax credit 20,000 crores which the Center may have to forego.

However, it must be emphasized that GST on oil is a long overdue reform and should be implemented now, as it offers the advantage of bringing uniformity in the country’s tax structure. All considered, the benefits of bringing fuel under GST far outweigh those of keeping it out of its ambit. For the record, even if we assume a hypothetical An exaggerated loss of 1.3 trillion, that is barely 0.4% of GDP that the government would have to survive.

Finally, some food for thought. Perhaps the government should also consider the option of linking fuel refills to Aadhaar cards or car registration numbers, so that fuel subsidies can be targeted at beneficiaries based on usage or income levels.

Soumya Kanti Ghosh and Disha Khetarpal are Group Chief Economic Advisor and State Bank of India Economist, respectively. These are the personal views of the authors.