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Home / Opinion / Views /  To bring petro fuels under GST, Bibek Debroy’s advice is worth listening to

A rose by any other name would smell as sweet. Policy proposals are not in that lucky league. Their salience varies, depending on who makes the proposal—the same measure has a different resonance, depending on whether it is endorsed by a WhatsApp forward, think tank, or retired civil servant brimming with bright ideas that stayed in an extended pupal stage during his active service or head of the Prime Minister’s Economic Advisory Council.

So, when the chairman of the Prime Minister’s Economic Advisory Council, Bibek Debroy, says that it would be useful to bring petro fuels under the goods and services tax (GST), it deserves welcome attention. It had been obvious right from 2017, when GST kicked in, that keeping petrol and diesel out of GST was inefficient. But the states were afraid that subsuming their state-level value-added tax /sales tax on petrol and diesel into the integrated GST would result in a loss of revenue. So, even though the Constitution Amendment that heralded GST specifically kept alcohol alone outside the ambit of GST, GST was not levied on petrol and diesel.

Later, the Centre also turned a votary of non-GST levies on fuels. It juiced its levies on fuels to make these a significant source of resource mobilization, substantially increasing its budget’s dependence on them. In 2013-14, when the price of crude averaged some $105 a barrel, the government’s revenue from fuel tax was 78,000 crore. When the price of crude fell sharply thereafter, the government found it expedient to keep the retail prices unchanged, raising its taxes on basic prices. Since consumers were not being asked to pay more, they did not grumble overmuch. In 2020-21, the government collected 3.75 lakh crore from its levies on petrol and diesel.

We use the term levies because the bulk of these revenues (94% in the case of diesel and 96% in the case of petrol, according to PRS ) kicks in from cesses and surcharges (for road and infrastructure development) rather than from excise duty. Excise duty goes into that pool of centrally collected taxes, to a share of which the states are statutorily entitled. Cesses and surcharges do not join the pool. By retaining non-GST levies on petrol and diesel, the Centre enjoys not just a fiscal bounty but also gets to keep most of it to itself, without sharing it with the states.

If the Centre and the states are persuaded, mindful of the greater good of the economy and sage counsel from economists like Bibek Debroy, to bring petro fuels under GST, how does that help? It would lower a range of prices, and make the GST chain more complete, allowing for easier follow-up of audit trails to enable fuller identification of the tax base for both indirect and direct taxes.

How does GST reduce the price, if the tax rate is not cut? Non-GST taxes cascade, meaning the price of a product on which tax is computed includes the elements of non-GST tax that have gone into the price of inputs for the good on which the tax is being computed built into the price. For example, consider an input A that costs 100, which bears a tax of 10% and is converted by a producer into product B by adding 20 of value. B bears a GST of 18%. If the tax on the input is GST, the pricing of B goes like this: cost of input ( 100) plus value-added ( 20) plus 18% tax on the price of B before tax ( 120 x 0.18 = 21.6). The producer of B does not add the tax of 10% of the input cost of 100 or 10 that he has borne while purchasing the input, because he gets an input tax credit for the 10 he has paid on the input and pays to the government only 11.6 ( 21.6 – 10) to the government. The 10 tax on the input has been paid by the supplier of A to the producer of B. The final price of B is 120 plus tax of 21.6, that is, 141.6.

Suppose the tax on the input A was not GST, and the producer of B could not avail of the input tax credit. Then, his pricing of B is as follows: input price ( 100) plus tax paid on the input ( 10) plus the value-added ( 20) plus the tax on the total price before tax ( 130 x 0.18 = 23.4), which amounts to 153.4. The tax paid on A goes into the price of B and into the tax paid on B. And the buyer of B ends up paying a much higher price for B, including a higher element of tax.

In the case of GST on both A and B, the total tax collected by the government is 21.6. When the tax on A is non-GST and B is sold to the end-consumer, who does not get to take any input tax credit, the total tax collected by the government is 10 plus 23.4 = 33.4. This raises the cost to the consumer. Subsuming petro fuel taxes into GST would avoid cascading of taxes and reduce final prices. Of course, some non-GST levies can be retained, and these would cascade, and the gain from GST would be proportionately lower.

You might wonder why any sane government would want to adopt GST which, going by the example above, lowers the tax take? This is because GST gives an incentive to every buyer to procure his or her supplies from those who give a bill and charge them tax, because that is the only way he or she can, in turn, supply billed goods to large buyers who always insist on proper invoices, and take the benefit of an input tax credit. Suppliers have an incentive to comply. The government obtains audit trails that it can follow up, to find tax bases that have evaded tax. GST results in superior tax collections because it truly widens the tax base and disincentivizes evasion. That way the tax collected increases although the tax paid per individual and per business may actually reduce, unless they were evading altogether in which case they are likely to have to start paying.

When all taxes are subsumed under GST, the tax paid by the final consumer is the total tax borne by the good in question. There is complete transparency. Plus, when goods are exported and you want to ensure that you do not export taxes, zero-rating the export and claiming input tax credit on the inputs that have gone into the export while paying zero tax to the government ensures that the export price has been stripped of all taxes leading up to the production of the export.

Non-GST taxes on fuels, which get embedded into the price of everything that is transported, kills off such efficiency and transparency.

So, it is clear that there are multiple efficiencies to be reaped by subsuming all indirect taxes into GST.  To grab the gain, we still need something that has been in short supply all along: political will. When the Prime Minister’s economic advisor offers sensible advice, the government should listen.

 

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