A few days ago, the union minister for petroleum and natural gas said that he would like to see petrol and diesel included under the ambit of the GST.
According to him, it would likely bring the prices lower. The idea seems to very good, but what’s stopping us from implementing it?
Continue reading as today we discuss the same.
The Policy Story
Back when GST was originally introduced (in 2017), the tax legislation was based on a definite pattern. It was a consumption-based tax.
Meaning that the tax was collected by the states in which the product was consumed rather than the States where the product was produced. For instance, Kerala would collect taxes on the biscuits consumed in its state,
even if the biscuits were produced in Maharashtra. So, for the states like
Maharashtra, the policy was not acceptable. They had already invested in many other resources to support the businesses like building roads,
highways, ports in a bid to incentivize manufacturing. They had deployed their money into the market to get a return on their investment by collecting taxes at the point of origin, i.e., where the manufacturing process is done. However, GST happened to be giving a different picture than they all wanted.
Accepting it would have severely hampered their prospectus about
working.
And although after listening to this Central Government kept insisting that the states that are manufacturing would get their respective chances to grow their revenue, still states wanted some guarantee. So, a bargain was made.
The Central government promised to incentivize them still they don’t happen to find an alternative to their specific problems. The idea was to create a
projection and then after five years compare it with actual GST revenues.
Each year a state’s tax revenue was ideally expected to grow at a 14%
rate (from the base years 2014-15). But if after that the actual collection would fall short the Central Government would make up for the shortfall. For that, they created a GST COMPENSATION FUND. Then began extracting a cess (a duty or tax above GST) from the sale of certain products like Tobacco. They hoped to pay the states using that fund.
But here comes a twist in the story. The central government was expecting state tax revenues to grow @ 14% when GDP was still in most states lagging and was in the single digits. These projections were completely out of whack and yet the Centre agreed to back them when it did not need to. This came out to be a monumental burden.
Well, you might ask – Why was the compensation fixed at such a high level
when it could have been lower and more accurate seeing the statistics.
Well, the answer is pretty interesting.
So, when proposing GST back in the day Centre saw that the states would never agree on the proposition, they were making to them. So, the central government has to do something big and of great value. They had made an offer that states would never refuse to take. And as they thought, when these high figures were proposed to them, they had no other choice but to give in. In the end, most of the states in the country were focused on achieving short-term goals. Their own political ambitions rarely let them see the bigger picture. And considering a country where the states are mostly cash strapped, the promise was too good to pass up. So, in the
end, they took it.
So, now the introduction to the story is out of the way. Let’s talk about
today’s story.
As of today, the Centre levies a tax on fuel, and then the states add a
VAT (Value Added Tax) on top of it. The states have full control over the rate of VAT they set. As we know fuels form a big portion of the income they have. And they also heavily rely on it too. So, if at the end you were thinking to bring everything under one umbrella, you have to deal with setting up a whole bunch of problems, starting with taxation rates.
Not knowing what they were going to charge?
For context, Maharashtra levies a 25% VAT on petrol and 21% VAT on diesel,
including an extra charge of Rs.10 they have per liter of petrol and Rs.3 on diesel. So, they’ll probably want to have the highest rates employed there.
But other states don’t charge that much. So, in the end, seeing the prices of petrol and diesel rising in their jurisdiction is something no one would want to see. Seeing this, it’s safe to say the States would fumble over this as they are only looking out for their own interests.
Even after this, if the Centre is going to implement the policy, how are they going to share the GST revenues with the states? If this happens to be affecting states' financial programs (which everyone believes it will) they will want to be adequately compensated. So, the Centre would have to again
offer them something irresistible like they did back in the year-2017.
Because in 2020,
the Centre backtracked on its original promise to compensate states at
14% after Covid struck. Given that, the states are going to be really skeptical about the claims made by the Central Government. So, reading all this you can understand
bringing petrol under the gambit of GST would need an unmatched effort on
many peoples’ part.
Is it Possible to do this?
Maybe. Someday!
Will it happen soon?
Perhaps not.
Thanks,
TEAM_TTIN.
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