A multiple tax levy for petroleum products?

VAT in principle is intended to tax consumption on a destination basis using the invoice-credit (output tax minus input tax) method. India’s journey towards GST was precisely this. A path to consolidate the multiplicity of taxes and levies under one umbrella law where credit of tax will be available on taxes paid at the earlier stages of the value-add chain. And having embarked on this transformational path, a lot of ‘bad features’ such as multiplicity of rates, compensation cess, removing a whole bunch of goods out of the GST regime, exemptions, were perhaps necessary for its political acceptance. The danger of course was that with the passage of time it would become difficult to get rid of these distortions. Which is the crossroads we are at today.

Everybody accepts that multiplicity of rates is not good. Convergence is becoming a mirage. The recommended 15.5 percent to 16 percent revenue-neutral rate necessary for ensuring no serious loss of revenue is an economic necessity but a political challenge.

As are the exemptions.  Even more so as Sushil Modi has mentioned, is the inclusion of petroleum products in the GST ambit. Revenue in any tax regime is a function of the tax base and the rate. Petroleum products were undoubtedly kept out to sweeten the acceptance of GST. In the process, though the tax base was whittled. But even as GST nears its fourth anniversary a serious debate is required as to how we wish to go forward. And Shri. Modi’s article is an excellent starting point. We should never forget that keeping a whole bunch of commodities out of GST negates the very concept of GST; of credit being available for taxes paid at the earlier stage. Petroleum products are ubiquitous-their usage is near-universal. The Central Excise and VAT paid on them are not available for availing credit. What this means is that the tax sticks to the products, and increases costs. The argument that the Centre and the States earn nearly Rs.5.5 lakh crore from Central Excise and VAT is justification for keeping petroleum products out of GST is no argument. The seductive appeal of keeping all high revenue yielding commodities out of GST would defeat the very concept of GST.

So is the specious argument that 42 percent of the revenue collected is shared with the states. This is a Constitutional commitment given; the very glue which binds federal relations. But once within GST, obviously, the burden of sharing will also not be there. Modi agrees that bringing petroleum products within the GST net will mean a sharp decrease in prices which is precisely the argument being made for its inclusion.

This when the inflation rates are threatening to go out of control, will be a huge soothing factor. The RBI, mandated to keep an eye on inflation, has in its last Monetary Policy Committee also called for “calibrated unwinding’ of high retail taxes in the main oil products.  Another aspect that needs to be kept in mind is that the non-inclusion of petroleum products in effect means that exports to get impacted-these are taxes that add to the cost of the exported product. This will hurt more in the absence of the MEIS scheme and the RoDTEP which is still in the works.

In this background, the suggestion given of a structure to take care of both, the revenue concerns of the Centre and states, and the integrity of GST need serious debate. Thus a 28 percent GST rate on Petroleum products as also a Central Excise/ VAT equivalent to offset the loss because of the goods moving to GST. This is not the best of solutions; it would in effect mean three rates-GST, Central Excise and VAT.

To the extent that this will help in ensuring some credit being available there will be a reduction in costs. This will have an impact up the value chain. The non-creditable Central Excise/VAT will of course add to costs. However, for this proposal to succeed it is incumbent that both the Centre and the States agree to not indiscriminately increase the Central Excise or VAT rate-portions which will be out of the purview of the GST Council. Ideally, the VAT rates should be uniform across States.  Obviously, the states will have to come on board; both the Centre and the states will have to ‘be willing to take deep cuts in their revenues’ for the proposal to get the nod of the GST council. This will require a lot of persuasions more so in these pandemic ravaged times. But worth the try and perhaps the only feeble half-step forward towards the larger goal. Who better than Sushil Modi to push this idea forward?