What's the problem in bringing petrol under GST? It's complicated

Feeling the pinch due to the steadily rising petrol and diesel prices? Waiting for the government to step in and announce an excise duty cut in the Union Budget 2018? Well, don't hold your breath for that. Agreed that this government has done it before-in October 2017, when fuel prices were nearly Rs 2 lower per litre than today-and yes, Finance Minister Arun Jaitley recently said that the Central government favours bringing petrol products under the GST umbrella. But, in reality, a short-term intervention by the government is pretty unlikely as it may disturb the fiscal deficit situation.

According to a GST Council source, who spoke to India Today on condition of anonymity, subsuming fuels in the new tax regime is not as easy as it is politically being made out to be. The problem is that the effective sales tax on fuel varies wildly from state to state.  For instance, Maharashtra charges 40% on petrol while Andaman and Nicobar charges just 6% ad valorem. The effective sales tax on diesel ranges from 6% to 29%. This means that each hike in crude oil price brings more revenue to the states. The Centre charges a fixed amount of Rs 19.48 on per litre of petrol and Rs 15.33 on diesel across the country.

The total levies put together are nearly 60% said the source, adding that, "If the central levy and dealers commission is added, the amount goes up to nearly 100% over the real cost of fuel. Now, if petroleum is included in GST, then the Revenue Neutral Rate (RNR) could be as high as 100%".

Such a high GST on fuel will not be acceptable pan India. Because once subsumed in GST, fuel will cost the same across the country. The corollary is that all the states with lower sales tax at present will see a sharp rise in prices, which will be political suicide for the ruling parties. States are also unlikely to agree to reduce their state levies on fuel since most of them are battling revenue deficit since the launch of the new tax regime.

The Centre, meanwhile, is unlikely agree to foot the bill. Having already reduced the Basic Excise Duty on Petrol and diesel by Rs 2 a litre last year, the government has precious little manoeuvring room left. Any further cut will hurt collections and disturb its plans to maintain fiscal deficit at 3.2%.

The bottomline is that there is no relief in the offing for the common man. Petrol prices are up 3% since the beginning of the month while diesel is up 6%. The government is aware that spiralling diesel prices will lead to a further spike in inflation as high transport cost for vegetables and essential commodities will push their prices up. But as sources in the Finance Ministry put it, "the government doesn't have enough to step in and announce cuts in levies to soften the prices of fuels".

Ironically, while the Congress is publicly attacking the government for not including petroleum in GST, the UPA, too, had not included petroleum in the GST constitutional amendment when it was in power. The Modi government included petroleum in the Act but any implementation was kept in abeyance till a revenue neutral situation could be arrived at post-GST scenario. As seen above, we are nowhere close yet.

The only other option left, of state-owned petroleum companies taking a hit to cushion the consumer, is also being ruled out at this moment. After all, the administered price mechanism on fuels was dismantled largely to let oil companies, mostly state owned, ensure that rising crude prices don't upset their economics and expansion.

But if you are thinking that things can't possibly get any worse, think again. The price of Brent crude, which serves as the Asian benchmark, today hit a new peak--$71 a barrel-for the first time since 2014. It has gone up 3% in just three days-prices stood at $68.89 a barrel on Monday- as the dollar continued to weaken and crude inventories in the United States fell for a 10th straight week amid ongoing supply cutbacks by OPEC and top producer Russia. To remind you, a group of oil producers including OPEC and Russia, the world's biggest crude producer, started to withhold production in January last year to prop up prices. And recently Saudi Arabia confirmed that major oil producers have agreed to continue cooperating on production after their deal on supply cuts expires at the end of 2018. No wonder Gary Ross, founder of PIRA Energy and head of global oil analytics for S&P Global Platts, is claiming that oil at $80 per barrel is possible in the near term. He was among the first to predict prices breaching $70 per barrel so we'd best start praying.

With agency inputs