In a recent discussion on transition of energy products into the Goods and Services Tax (GST) with economists and industry experts, NITI Aayog has proposed a formula for bringing two motor fuels viz. petrol and diesel besides electricity under the new regime. Under it, the Centre could keep the two fuels in the highest slab of 28% and electricity in the 18% slab. To compensate states for the loss of revenue resulting from the shift to the GST dispensation – fully in case of electricity and partially for petrol and diesel – the think-tank has proposed levying a cess @50%.
To understand the formula, and its implications, at the outset, it is important to place a few basic facts.
First, as per a 2016 Constitution Amendment Act, petrol, diesel, and electricity (besides crude oil, natural gas, aviation turbine fuel or ATF) are included under GST, but zero rated, meaning that they continue to be governed by the erstwhile dispensation i.e. while the Centre collects central excise duty (CED), the States levy value added tax (VAT) and other local taxes. Electricity is taxed exclusively by the states. When will these levies be replaced by GST? This decision rests with GST Council, which has to decide on the date of taxing fuel under GST – as mandated under Article 279A (5) of the Constitution.
Second, under the GST Compensation Act, 2017, the States are entitled to compensation for five years (from July 1, 2017 to June 30, 2022) for the loss of revenue to be calculated as the difference between their actual collection (including transfer of their share in indirect tax collected by the Centre) and the amount they would have got with annual growth at 14% over the 2015-16 level under the erstwhile regime prior to July 1, 2017 (the GST launch date).
Third, under an amendment to the GST Compensation Act (2018), the Centre levies a cess on supply of demerit goods (those which fall in the highest tax slab of 28%) such as automobiles, tobacco, drinks and so on with a proviso to use the proceeds for compensating States. The cess was to remain in force for five years in sync with the Centre’s obligation to compensate States for that period.
The rationale behind keeping these arrangements in place for 5 years was that at the end of this transition i.e. June 30, 2022, the GST dispensation would have acquired the much-needed “vitality” and “resilience” to yield sufficient resources for the States to meet their budgetary requirements within a prudential limit set under the Fiscal Responsibility and Budget Management Act (FRBM) thereby obviating the need for any extra support beyond this date. With less than a year to go, things have not panned out as expected.
During the first two years, viz. 2017-18/2018-19, the situation was comfortable with collection from the cess being higher than the shortfall in tax revenue faced by States. This resulted in surplus of about Rs 47,000 crore in the cess pool as on March 31, 2019. In the succeeding two years however, it deteriorated with a deficit of Rs 70,000 crore during 2019-20 (this was partly mitigated by using the surplus from previous two years) and Rs 180,000 crore during 2020-21.
During 2020-21, against requirement of about Rs 264,000 crore, the collection in cess pool was only Rs 84,000 crore leaving a deficit of Rs 180,000 crore. Of this, Rs 110,000 crore was borrowed by the Centre under a special RBI – enabled mechanism for transfer to States as ‘back-to-back’ loans. That left an uncovered gap of Rs 70,000 crore. Add expected deficit of Rs 90,000 crore during the current year, the Centre will have to borrow about Rs 160,000 crore during 2021-22.
The cess has to continue even beyond June 30, 2022 if only to service this huge debt of Rs 270,000 crore (110,000 plus 160,000). Meanwhile, States have also made a representation to 15th Finance Commission to continue the cess for a further 3 years. This means, the GST Council will not only continue with existing cess/levies but also raise them or even bring more items under its purview.
Now, consider the impact of NITI Aayog idea of bringing fuels and electricity under GST, impose 50% cess or even more and use the proceeds to compensate States for the resulting revenue loss. To get a sense, let us look at this.
In Delhi, the pump price of around Rs 100 per litre (as on July 5, 2021) included the ex-refinery price plus freight: Rs 40/-; dealer commission: Rs 4/-; CED: Rs 33/-; VAT: Rs 23/-. The tax component alone is Rs 56 per litre or 56% of the pump price (in case of diesel, it is 50%)).
CED of Rs 33 per litre includes Rs 21/- due to the Road and Infrastructure Cess (RaIC) and Agri-infrastructure Cess (AIC) which is entirely retained by the Centre. Of the balance Rs 12/-, it retains 59% or Rs 7/- and gives Rs 5/- to the state (41% under the 15th Finance Commission or FC devolution formula). On a net basis, therefore, the Centre gets Rs 28/- (21+7), while almost an equivalent amount (23+5) goes to the state. Expressed as percentage of ERP (ready to send to petrol pump) or Rs 40/-, this is 70% each.
If, as per NITI Aayog formula, petrol is placed in the 28% slab under GST, the Centre and State will get to tax it @14% each. As per FC devolution formula, out of its collection, the former can retain only 59% implying that it will have to contend with only 8.26% (14×0.59) even as the latter will get 19.74% (14+14×0.41). The shift to GST dispensation will thus result in Centre’s tax collection plunging from 70% to a low of 8.26% whereas, the State’s collection will dip to 19.74%.
Currently, the Centre collects Rs 335,000 crore from petrol and diesel in taxes, while the states collect Rs 203,000 crore (2020-21). One shudders at the very thought of revenue loss that will result from transition of these fuels to GST. As for electricity, currently duty being a high of 25% in some states, shift to GST in the tax slab of 18% – implying states getting to tax @9% – will result in huge revenue loss.
The think-tank talks of compensating the loss to states ‘fully’ in case of electricity and ‘partially’ for fuels. Partial compensation of revenue loss to states is arbitrary (even this limited relief will be at the cost of strangulating industries which contribute to the cess pool – by imposing 50% cess on top of subsisting 28% tax plus cess). Ironically, the proposal doesn’t even mention about compensating the Centre which will suffer a much bigger loss.
To conclude, the formula floated by NITI Aayog is not practical. Neither the States nor the Centre will accept. Given the yawning gap between the existing tax rate and even the maximum that can be levied under GST (read: 28%), shift of fuels to the new regime is unthinkable. It could be thought of only in a scenario where monthly GST collection reach at least Rs 150,000 crore (currently it is around Rs 100,000 crore). NK Singh, Chairman 15th FC feels there is scope for increasing it by 3-4% of GDP. Till that happens, it will be status quo.