GST on Petrol and Diesel

GST on Petrol and Diesel: What to Expect and How It Will Impact Prices

The taxation of petrol and diesel in India has long been a complex issue, with multiple layers of taxes imposed by both the central and state governments. This has led to significant price variations across states. However, there has been ongoing discussion about bringing petrol and diesel under the Goods and Services Tax (GST) regime. This blog will delve into the current tax structure, the proposed GST structure, and its potential impact on fuel prices.

Current Tax Structure

As of now, the price of petrol and diesel includes several components:

  1. Base Price: The initial cost of the fuel, determined by international crude oil prices and refining costs.
  2. Excise Duty: A tax levied by the central government. This is a fixed amount per liter.
  3. Dealer Commission: The margin earned by fuel station dealers.
  4. Value Added Tax (VAT): Imposed by state governments, varying from state to state.
  5. Cess: Additional charges imposed by the central government, such as the road and infrastructure cess.
Example Breakdown for Petrol (Assuming ₹100 per liter)
  1. Base Price: ₹35
  2. Excise Duty: ₹20
  3. Dealer Commission: ₹3
  4. VAT: ₹18 (varies by state)
  5. Cess: ₹10

Total: ₹35 (Base Price) + ₹20 (Excise Duty) + ₹3 (Dealer Commission) + ₹18 (VAT) + ₹10 (Cess) + ₹14 (Adjustments) = ₹100

Example Breakdown for Diesel (Assuming ₹90 per liter)
  1. Base Price: ₹30
  2. Excise Duty: ₹15
  3. Dealer Commission: ₹2.50
  4. VAT: ₹16 (varies by state)
  5. Cess: ₹8

Total: ₹30 (Base Price) + ₹15 (Excise Duty) + ₹2.50 (Dealer Commission) + ₹16 (VAT) + ₹8 (Cess) + ₹18.50 (Adjustments) = ₹90

Hypothetical GST Structure

If petrol and diesel were brought under GST, it would simplify the tax structure by replacing multiple taxes with a single GST rate. Here’s how it might look:

Hypothetical GST Structure for Petrol (Assuming 28% GST)
  1. Base Price: ₹35
  2. Dealer Commission: ₹3
  3. GST (28%): 28% of ₹38 = ₹10.64

Total: ₹35 (Base Price) + ₹3 (Dealer Commission) + ₹10.64 (GST) = ₹48.64

Hypothetical GST Structure for Diesel (Assuming 28% GST)
  1. Base Price: ₹30
  2. Dealer Commission: ₹2.50
  3. GST (28%): 28% of ₹32.50 = ₹9.10

Total: ₹30 (Base Price) + ₹2.50 (Dealer Commission) + ₹9.10 (GST) = ₹41.60

Impact of GST on Fuel Prices

The application of GST on petrol and diesel would bring significant changes:

  1. Uniform Pricing: GST would standardize fuel prices across states, eliminating the current price variations due to different VAT rates.
  2. Potential Price Reduction: In the example above, the GST-inclusive price is considerably lower than the current price. However, this simplistic calculation does not account for possible adjustments by the government to protect revenue.
  3. Revenue Implications: Both central and state governments derive substantial revenue from fuel taxes. Shifting to GST might necessitate compensatory measures to offset the loss of revenue, which could involve setting higher GST rates or other forms of taxation.
  4. Consumer Impact: If the GST rate is set lower than the current cumulative tax rate, consumers could benefit from lower fuel prices. Conversely, if the GST rate is high, the price reduction might be minimal.

Conclusion

The proposal to bring petrol and diesel under the GST regime aims to simplify the tax structure and ensure uniform pricing across the country. While the hypothetical GST structure suggests lower prices, the actual impact would depend on the GST rate decided by the GST Council and any compensatory mechanisms put in place to balance government revenues. As the discussion continues, stakeholders, including the government, industry players, and consumers, will need to weigh the benefits and challenges of this significant policy shift.