Introduction to GST and Its Impact on Petrol and Diesel Prices

The introduction of Goods and Services Tax (GST) in India has been a significant event in the country's economic landscape. However, one of the most hotly debated aspects of GST has been its impact on essential commodities such as petrol and diesel. This article explores whether GST will lead to a reduction in the prices of these fuels, and how it will affect the government's revenue.

Impact of GST on Petrol and Diesel Prices

On Common Man: According to recent estimations, if GST is applied to petrol and diesel, the prices of these fuels are expected to see a considerable reduction. Specifically, petrol is expected to decrease by approximately 26 rupees, while diesel could drop by around 20 rupees compared to their current prices. This price reduction will directly benefit consumers, making these essential fuels more affordable.

Impact on Government Revenue

While the price reduction for consumers is a positive change, it comes with significant implications for government revenue. One of the primary concerns is the potential decrease in GST revenue. It is estimated that the reduction in revenue could be around 1 lakh crore rupees, which translates to 0.4% of the GDP. This loss in revenue is a significant challenge for the government, especially given the roles that petrol and diesel play in the transportation and logistics sectors.

Reasons for Not Applying GST to Petrol and Diesel

Several reasons have been cited for not applying GST to petrol and diesel:

Revenue Degradation: The primary concern is the potential decrease in revenue. To maintain revenue neutrality, the current tax structure needs to be carefully analyzed and the GST rate needs to be set such that no loss is incurred by the government. Tax Calculation: Currently, there is a complex tax structure involving Central Excise Duty and State VAT. Implementing GST would simplify this process, but it also necessitates a thorough recalibration of the tax rates to ensure that the government does not face any financial loss. Diverse Tax Rates: Different states apply varying VAT rates on petroleum products, creating a patchwork of taxes. Unifying these rates under GST would simplify the tax process but also requires careful planning to avoid uniformity in taxation leading to reduced revenue for some states.

How the Price of Petrol and Diesel is Decided

The pricing of petrol and diesel is determined by the oil companies. Before 2014, the government was responsible for setting these prices, but since then, the responsibility has shifted to the oil companies. The calculation of the price involves multiple components:

Base Price: The base price for petrol is around 40 rupees per liter. Excise Duty: This accounts for about 32.9 rupees per liter. Dealer Commission: This is around 3.84 rupees per liter. Value Added Tax (VAT): This adds another 23 rupees.

The total comes to approximately 100 rupees per liter, which is the price that consumers pay.

Transition to GST

In the current system, both Central Excise Duty and State VAT are applied to petrol and diesel. Central Excise Duty is first levied and then added to the cost. On this added cost, State VAT is applied, creating a cascading effect of taxes. With the introduction of GST, only a single tax (GST) will be levied, eliminating the need for both Central Excise Duty and State VAT. This will simple the tax structure and, under the highest rate of 28%, reduce the overall cost to the consumer.

Key Points: The reduction in price under GST is expected to be significant, potentially even lower than 28% unless a new higher rate is introduced. Any additional revenue loss could be compensated by increasing the tax cess, which is currently used to bridge the gap between the current tax structure and the GST system.

Conclusion

The application of GST to petrol and diesel presents both opportunities and challenges. While it brings the promise of reduced prices for consumers and a simplified tax structure, it also poses significant risks to government revenue. The government will have to ensure that the transition is smooth and that no loss in revenue occurs. The final outcome will depend on how well the central and state governments manage these changes.