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On Wednesday, Prime Minister Narendra Modi said that his government would draw natural gas into the ambit of our goods and services tax. As GST applies only to added value, this shift would rescue the refined product at its point of use from a cascade of taxes, lower its final price, and thereby help raise India’s usage intensity as part of a larger plan to tilt our energy mix towards a relatively clean fossil fuel. Gas-fired power plants threaten our planet less than coal-burning generators. While Modi did not lay out a timeline for the switch, his declaration of intent could set the stage for a far bolder move to place all hydrocarbons under GST, a taxation system that is yet to be universalized. For GST to serve its envisaged purpose, it must cover all goods and services. But tax reformers have found it difficult to scrape off the detritus of various taxes that fuels have been slapped with down the decades. Like the consumption of liquor, which has also been kept out of India’s GST regime, demand for fuel is relatively inelastic. Price hikes do not reduce offtake much. This makes it an easy target for revenue-raising. Governments at both the central and state levels, however, should give up this addiction.

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That most pre-GST taxes result in economic inefficiency is well known. Value-added tax (VAT) is just one of these. There is also excise duty, often even a sales tax, and their burden gets heavier from one link of a value chain to the next, with dues to be paid down the line on bills that include levies paid earlier. This way, they not only raise retail prices, they also deter the specialization that enables the creation of more value with fewer resources, as Adam Smith explained back in 1776 through his example of a ‘pin factory’. Globally, apart from crude oil extraction, fuel production and retailing have mostly been a vertically-integrated affair, but this need not be so. As retail skills and refinery competence differ, their separation as businesses could boost the efficiency of both to the benefit of users. Our big problem in this sector, however, has more to do with the extortionate rates that apply. This is another reason why crude oil, petrol, diesel, gas and aviation turbine fuel should be under the far less onerous rate structure of GST.

Petrol is currently selling at over 100 per litre in Rajasthan, whose levies on this fuel are the country’s heaviest. Other states have also seen pump prices turn into eye-poppers. Take Delhi. On a base price of 31.82 per litre, the Centre levies an excise duty and cess of 32.90 and the state levies a VAT (on the dealer’s cut too) of 20.61. This raises the average retail price above 89, including the dealer’s slice of 3.68. This burden is a legacy of revenue-aimed hikes in fuel taxation about half a decade ago, after America’s shale oil output turned into a gush and global crude prices fell steeply. The idea was to shore up India’s coffers. But a habit has taken hold. Last March, and then in May, as covid pushed our oil import bill down, the Centre imposed an additional surcharge and cess of 13 per litre on petrol and 16 on diesel. Yet, now that oil is headed up again, it has not rolled these back. A reluctance to ease taxes on these products can be explained by the poor shape of our national finances. The Centre’s fiscal deficit was understandably enlarged by covid contingencies. But we must not overtax fuel users in perpetuity. Let’s go for fairness and efficiency. Apply GST instead.

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