The weekend attacks on Saudi Arabia’s oil infrastructure is expected to disrupt the global oil supply by about 5%. In response, the intraday movement in oil markets witnessed a recent record. With a gain of 20%, it was the biggest intraday gain since the Gulf War of 1991. The situation remains uncertain. The US is increasingly shrill in its allegations that Iran is behind the disruption. Regardless of the veracity of this claim, one can be sure the risks from geopolitical factors for the oil market has risen significantly in the last 72 hours. This difficult moment comes ahead of an important meeting of India’s GST Council. This should catalyze a discussion in the Council on the feasibility of bringing petroleum products within the GST base. Currently, the Constitution gives states the right to tax the sake of petroleum crude, diesel, petrol, natural gas, and aviation turbine fuel.
Unless the states agree, they cannot be brought into the GST base. There is a compelling case to bring them in. Once they are brought in, companies which use these products can offset the taxes they pay on them in their overall GST outgo. It will remove existing distortions and create a more comprehensive GST base. The case against this move is that states rely heavily on petroleum taxes and this is not a good time to make this change. This argument was refuted by a finance ministry appointed committee under the former chief economic adviser Arvind Suubramanian in December 2015. The committee, which had representatives from state governments, made a case to include petroleum products in GST. The also argued that states could be allowed to levy a top-up tax to offset any potential loss of revenue. Thereby, petroleum products can be used to widen the GST without in any way compromising the interests of states. It’s time to act on this suggestion.