The Centre and the states need to bring petroleum products into the goods and services tax (GST) framework sooner rather than later. Oil products garner hugely disproportionate indirect tax revenues, but we need to widen the tax regime, modernise it and rev up efficiency by eschewing tax-on-tax and cascading rates along the value chain. There’s a solid case for the Centre to include all petro-products in the GST regime, levy a top-up cess to account for externalities like pollution, and to proactively share the proceeds with the states.
Reports say that with the GST rollout, oil producers, refiners and marketers could take a hit of as much as Rs 25,000 crore per annum. True, the GST Council, the body of Union and state finance ministers, is to decide the date for bringing petroleum products under GST.
But as of now, petroleum crude, natural gas, diesel and petrol are all out of the GST framework. So, input taxes paid on the output of crude oil, gas and automotive fuel would not be creditable, thus jacking up the tax burden. Thankfully, oil products such as cooking gas, kerosene and naphtha are included in the GST regime, so some taxes can be set-off against taxes already paid. But it would be a messy situation that is wholly avoidable.
Oil companies would need to comply with both the old and new tax regimes, and in any case, tax credits won’t be transferable between the two systems.
Instead of muddling along with a suboptimal tax regime, we need to promptly bring all petroleum products into the GST framework. India’s large and fast-growing transportation, logistics and distribution sector needs to be made tax-efficient with GST on fuels. It would be very much as per global practice and boost India’s competitive advantage right across the board. It makes sense to do this fast.