Highlights:
- Every state has its own fuel tax, and the Central government collects its own duties and cess
- In some parts of the country, petrol prices have hit ₹ 100 per litre
- The government may cancel a planned borrowing of ₹ 49,000 crore in the last two weeks of March
Petrol prices could fall to ₹ 75 per litre across the country if the Goods and Services Tax (GST) were implemented, but political will is lacking, which keeps Indian oil product prices among the highest in the world, according to SBI economists who said this on Thursday (March 4).
According to economists’ calculations, diesel would cost ₹ 68 per litre, and the revenue loss will be of just ₹ 1 lakh crore, or 0.4% of GDP, for the Centre and states. This is based on global oil prices of USD 60 per barrel and a ₹ 73 per dollar exchange rate.
Currently, each state has its own fuel tax, and the Central government collects its own duties and cess. Petrol prices have surpassed ₹ 100 per litre in some parts of the country, raising questions about the high taxation that is making fuels more expensive.
Bringing petrol and diesel under the goods and services tax is an unfinished agenda of the GST framework, according to SBI economists, and having the prices under the new indirect tax framework will help.
The SBI economists also said, “The Central government and states are reluctant to bringing crude oil products under the GST (goods & services tax) system because sales tax/VAT (value-added tax) on petroleum products is a significant source of revenue for them. As a result, there is a lack of political will to bring crude into the GST framework.”
According to SBI Economists, states currently choose to levy a combination of ad valorem tax, cess, extra VAT/surcharge depending on their requirements, and these taxes are levied after taking into account the oil price, shipping fee, dealer commission, and the Centre’s flat excise duty.
The economists came at the final price estimates by assuming crude prices and the dollar rate, dealer commissions of ₹ 2.53 for diesel and ₹ 3.67 for petrol, transportation charges of ₹ 7.25 for diesel and ₹ 3.82 for petrol, a cess of ₹ 30 for petrol and ₹ 20 for diesel that will be split evenly between the Centre and states, and a GST rate of 28%.
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It said the ₹ 1 lakh crore fiscal impact of bringing petroleum prices under GST was calculated using a 15% increase in diesel consumption and a 10% increase in petrol consumption.
Under the baseline scenario, a rise of USD 1 in crude oil prices would raise petrol prices by around 50 paise and diesel prices by around ₹ 1.50, lowering the total deviation by around ₹ 1,500 crore.
If the system is moved to GST, the states that actually have the highest share of tax revenues would be the biggest losers, it said, quickly adding that customers will save up to ₹ 30. Surprisingly, the simulation exercise indicates that if crude oil prices fall by USD 10 per barrel, the Centre and states could save close to ₹ 18,000 crore if they maintain baseline petrol prices without passing the benefit on to consume₹, which is higher than the ₹ 9,000 crore saved when crude prices rise by the same amount.
“We recommend that the government establish an oil price stabilisation fund that can be used to compensate for revenue losses in difficult times by cross-subsidizing funds saved in good times., without hurting consumer,” it said.
For LPG cylinder, economists suggested an expanded and graded subsidy for low-income consumers, which could be phased out over a 5-year period.
Meanwhile, the latest revenue and expenditure figures, according to the note, could result in a fiscal deficit of 8.7% in FY21, down from 9.5 percent in the revised budget estimates. They believe it is highly likely that the government will cancel the ₹ 49,000 crore borrowing planned for the last two weeks of March.
