Implications of Introducing GST on Petrol and Diesel Prices in India

The current tax structure in India for petrol and diesel involves both Central Excise Duty and State VAT. This results in a cascading effect, where taxes are applied on top of other taxes, often leading to increased prices for consumers. As the Government contemplates implementing Goods and Services Tax (GST) on these petroleum products, it is crucial to examine the potential effects this would have.

Current Tax Structure

Currently, petrol and diesel are not subject to GST. Instead, they are taxable under VAT, with respective tax rates of 29% and 19%, along with additional taxes such as cess of 1 rupee per litre for each. Central Excise Duty is also levied on these products, adding to the overall cost.

Potential Impact of Introducing GST

The introduction of GST on petrol and diesel would significantly alter the current tax landscape. Under the GST model, a single tax rate would be applied, specifically 28%. This would eliminate the Central Excise Duty and State VAT, thereby removing the cascading effect of taxes. This simplification could lead to a reduction in the final price to the consumer, contingent on the prevailing rate of crude oil.

Compensation and Future Cess

States and Union Territories (UTs) will lose revenue due to the removal of State VAT. Consequently, they would likely demand compensation to maintain their current level of funding. This compensation could be in the form of a tax known as the Compensation Cess, which may range from 20 to 30%. This additional levy would effectively mitigate the reduction in prices caused by the elimination of cascading taxes.

Price Calculations

Using current market conditions, if diesel and petrol were placed under a 28% GST slab, the overall price reduction could be between Rs. 7 to 10 per litre, assuming crude oil prices remain constant. However, because of compensation cess, the final price reduction might be less pronounced.

Revenue Neutrality

The government aims to ensure that the introduction of GST will not lead to a loss of revenue. They are likely to implement a revenue-neutral rate, where any shortfall in current revenue would be compensated by introducing surcharges or other financing mechanisms. As such, while the taxes themselves may change, the overall revenue generated from these petroleum products would not be expected to decrease significantly.

Conclusion

The introduction of GST on petrol and diesel in India represents a significant shift in the taxation of these petroleum products. While it promises to simplify the tax structure and potentially reduce prices, the effects will depend on the compensatory measures implemented by the government. Consumers can anticipate some reduction in prices, albeit possibly limited by additional cesses to compensate for lost revenue.