Replying to the debate in the parliament on July 20, 2018 on the no-confidence motion against his government, prime minister, N Modi gave a comprehensive account of the various schemes, reform measures and achievements during the last 4 years of its stint. A prominent reform measure listed by Modi was the Goods and Services Tax [GST] launched on July 1, 2017.
Dwelling on the contentious issue of 5 hydrocarbon products natural gas, crude oil, petrol, diesel and aviation turbine fuel [ATF], he opined that under the UPA – version of the constitution amendment bill [2010], these products were excluded. If, that bill were to be enacted into a law then there would have been no possibility to include them at any point of time in the future. On the other hand, in the law enacted by the present government, [2016], these have been included.
Under the erstwhile dispensation [excise duty, VAT, service tax and over a dozen other local taxes], the economy was not only burdened with high rates but also their cascading effect [tax-on-tax]. For instance, nearly 50% of the retail price of petrol and diesel is accounted for by taxes alone. With their inclusion in GST, one would have expected a substantial dilution of the tax component thereby leading to corresponding reduction in the price.
But, that has not happened thus far. The reason is for now, these products are ‘zero’ rated. Shorn of jargon, what it means is that their taxation continues to be governed by the erstwhile dispensation. In other words, it is business as usual even as industries bear the brunt of all the ills germane to that regime which this path breaking reform [read: GST] was intended get rid off.
So, what has changed? On what basis, team Modi claims that it has brought about a substantial improvement in the way these products are to be treated?
The difference is that unlike the UPA – version of the law which would have continued with levy of ED/VAT/service tax [besides local taxes] ad infinitum, henceforth these levies will be replaced by GST. But, when will this happen? This decision vests with the GST Council – the body created vide the amendment act – which will determine the date of transition to rating under GST and the category under which each of these products will be put for levy of tax.
Prima facie, this may appear to be a better scenario compared to absolutely no hope offered by the UPA – regime but from all available indications, there is a long road ahead.
Even before the launch of GST [July 1, 2017] union finance minister, Arun Jaitely who also happens to be the chairman of the Council had given a hint that inclusion of natural gas [NG] would be taken up for consideration in its 18th meeting to be held just before that. Since then, it has been more than an year and whether or not this would come up on the agenda remains within the realm of speculation [an expectation that this would be done in the meeting held on July 21, 2018 did not materialize].
The NG occupies a small space on the energy landscape of India [the revenue to states from sales tax/VAT on it was a pittance about ₹5,700 crore in 2015-16] which is dominated by petrol, diesel and ATF. If, there is so much of dilly dallying with regard to inclusion of the former, one can imagine the fate of latter wherein the revenue implications run into hundred of thousand crore [during 2016-17, the states garnered Rs 166,000 crore as VAT from these products].
The crux of the matter is that the states who are so much used to the mountain of revenue garnered from high VAT as also the bonanza from tax-on-tax [nearly one third of their revenue comes by way of VAT on excise duty] that they are simply not in a mood to let it go. This is despite full compensation promised to them for any loss of revenue vis-à-vis the 14% guaranteed growth over 2015-16 level.
Even the union government may be having a vested interest in continuing with status quo as its revenue from levies on petroleum products is huge. During 2015-16 to 2017-18, it collected Rs 650,000 crore, a major chunk coming from ED on petrol and diesel. During the current year, the collection [including road and infrastructure cess on petrol and diesel] is projected at Rs 258,000 crore.
In this backdrop and considering that all decisions in the Council are taken by consensus in the spirit of strengthening cooperative federalism, it is most unlikely that it will give the green signal for taxing these products under GST only. Even if they were to be brought under the highest tax slab of 28% [which is illogical and untenable as by any stretch of imagination, these cannot be treated as luxury/de-merit products], this itself would be a steep reduction from the current high level of 45%-50%. Hence, the resistance is inevitable.
In a bid to prevent erosion in the revenue, the Council may allow the states to retain power to levy some tariff/duty [under some other nomenclature, if not VAT] in addition to GST [this idea has already found place in deliberations on the subject]. If, it happens, this will not only militate against the basics of the new tax regime, but will also seriously undermine its efficacy.
The continuation of ED/VAT or their re-incarnation in some other form on petroleum products is out of sync with the underlying philosophy of GST. The former must go for the latter to be meaningful and effective. But, that seems unlikely in the next 5 years.
To conclude, the inclusion of oil and gas products in the constitution amendment act has not made any material difference to the situation on ground except that it has generated some hope besides giving brownie points to Team Modi in its on-going 20:20 match with the grand old party.