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Informist, Thursday, Feb. 20, 2025

 

--Fin min sources: Fuel unlikely to come under GST due to huge revenue hit

 

By Priyasmita Dutta and Sagar Sen

 

NEW DELHI – The government's plan to bring fuel items under the ambit of the Goods and Services Tax may not see the light of day as the finance ministry is daunted by the huge revenue implications of such a move, both for the Centre as well as states, senior officials from the ministry said.  

 

"Excise duty and value added tax on petrol, diesel and aviation turbine fuel form a significant portion of Centre's as well as states' revenues...there is no way GST can compensate for such large revenues," a senior finance ministry official told Informist.

 

The current thinking of the finance ministry is at odds with the stance taken by several top government officials, including Minister of Petroleum and Natural Gas Hardeep Singh Puri, who had strongly advocated for bringing fuel products within the ambit of GST.

 

When Finance Minister Nirmala Sitharaman was asked this week about the plans to bring fuel items under GST, she put the ball in states' court. "We have already made provisions in our GST law for whenever petrol and diesel, at whatever GST rate, is to be brought under GST. States will have to take a decision on it," Sitharaman told reporters in Mumbai on Monday.

 

But state governments, too, have been cold to the idea. The GST Council, at its last meeting in December, had discussed bringing aviation turbine fuel under GST, but states shot the idea down due to concerns about their revenues. 

 

Petrol, diesel, natural gas and aviation turbine fuel are not yet taxed under GST and are subject to VAT, central excise duty, and central sales tax. Fuel prices vary from state to state depending on the rate of VAT levied by state governments.

 

"The Council tried to make movement in that direction by discussing GST on ATF but even that did not go through... petrol and diesel will come into the picture much later," another finance ministry official said.

 

REVENUE HIT

According to the first official quoted above, states and the Centre collect about INR 3.00 trillion each from taxes imposed on these fuels. "INR 3 trillion is almost a third of Centre's total GST collections, there is no way we can collect that much from GST," the official said. For 2024-25 (Apr-Mar), the Centre has projected collections from GST at INR 9.08 trillion.

 

As per data from Petroleum Planning & Analysis Cell, state governments collected INR 2.93 trillion in FY24 from sales tax and VAT on fuel, while the Centre collected INR 2.74 trillion. Separately, the Union Budget for FY26 has projected the Centre's collections from excise duties to be INR 3.17 trillion. 

 

If fuel items were to be brought under GST, a loss of revenue for the Centre as well as states would be inevitable because the current GST structure would not allow for taxing these items as heavily as they are taxed right now, finance ministry officials said.

 

The current GST structure allows for items to be taxed at 5%, 12%, 18% or 28%, with the highest slab mostly reserved for luxury items and sin goods. Even if fuel items are clubbed together with luxury goods, taxing fuel even at the highest GST rate would not be enough to ensure that tax revenues are unaffected.

 

Taking Delhi as an example, based on the price build-up of petrol effective from Feb. 1, over 37% of the retail pump price is owing to excise duty and VAT. Similarly, for diesel, currently taxes make up 33% of the retail price in Delhi. The implication is that revenue neutral rates of GST for petrol and diesel would lie somewhere near 37% and 33%, respectively.

 

Of course, the GST Council can carve out a separate rate slab for fuel if it wants to maintain revenue neutrality. The second official quoted above said that tweaking the tax structure to accommodate fuel is possible, but it is a far-fetched idea as the road to that destination has insurmountable roadblocks, the most important being building consensus among states on the issue.  End

 

Edited by Tanima Banerjee

 

 

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