Petrol And Diesel In The GST Conundrum: Unravelling The Test Of Cooperative Federalism

Current Taxation Regime on Petrol & Diesel

With the introduction of GST in 2017, subsuming an array of Central and state-level Indirect taxes on all goods and services, only two categories of goods were carved out to be outside the GST purview- while alcoholic liquor for human consumption is specifically excluded under the proviso to 5(1) of the IGST Act, Section 5(2) makes it incumbent on the government and the GST Council whether and when to include Petroleum crude, high-speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel under the GST ambit. According to the 101st Constitution Amendment Act, it is up to the GST Council to decide the date on which such a move is to be taken. However, to date, these goods are still outside the GST ambit, which means that the central government continues to levy excise duty on them while state governments are charging VAT.

The Union government levies a constant and uniform excise duty throughout the country, comprising Basic (₹2.6/ltr for petrol, ₹1.8/ltr for diesel) and Special additional excise duties (₹11/ltr, ₹8/ltr for diesel) coupled with Agriculture, infra and development cess (₹2.5/ltr for petrol and ₹4/ltr for diesel) and Road & infra cess (₹5/ltr for petrol, ₹2/ltr for diesel), which adds up to Rs.19.90/litre of petrol and Rs.15.80/litre of diesel. On the other hand, the state governments levy Value-added Tax (VAT), sales tax and other additional charges and cesses at differential rates at their own discretion, leading to a difference in petrol and diesel prices across India varying from as high as 35% and 27% VAT respectively, in Telangana to mere 1% in Andaman and Nicobar, resulting in a wide gap of highest price of petrol being ₹110/ ltr in Andhra Pradesh to as low as ₹81 in Andaman. While this dual levy might sound like double taxation, i.e., a tax on tax, creating a cascading effect, its operation and levy are such that States VAT is not imposed on the base or ex-factory price but after the duties are imposed by the Union, along with dealer's commission in their respective states.

Dent to States' Revenue- The Fiscal Federalism Argument

The Centre and the states, therefore, have the flexibility to raise or reduce taxes on Petroleum and diesel, which will not be the case if these products are brought under GST. Especially from the perspective of the states, the differential levy is quite evident, which is largely dependent on the varied welfare needs of the state governments. For example, very recently, the Karnataka government has hiked sales tax in the state from 25.92% to 29.84 % on petrol and from 14.3% to 18.4% on diesel, the principal rationale being to channel the increased revenue to meet the revenue shortfall that would arise due to the additional spending of Rs 10,000 crore annually to implement welfare measures through the five guarantees such as free bus travel for women, free electricity, etc. It is exactly this concern that scholars like RS Nilakantan have elucidated on how GST arrangement, as tax reform, has removed the power of the states to implement experimental welfare measures that can yield even generational dividends (by drawing the analogy with the introduction of mid-day meal scheme for the first time in India by the Tamil Nadu government in the 1980s).^[1]

Furthermore, this issue is more glaring for states whose exchequers are significantly dependent on VAT collections. Official data from the Petroleum Planning and Analysis Cell (PPAC) shows that, on average, taxes on petroleum make up 11-17% of the state's own tax revenue of the top five States in FY24, including Gujarat, Tamil Nadu, Maharashtra, UP, and Karnataka. While these states now impose VAT in a 20-25% range, along with cesses, by subsuming under GST, the only possibility would be to impose the highest 28% slab. Based on the supply chain mechanism of oil companies in India, as the majority of oil refineries' installed capacity and explorations are concentrated only in a handful of states, inter-state sales would take the lion's share in Oil sales, with IGST being imposed on such inter-state supply from Oil Manufacturing Companies (OMCs) to the dealers in respective states.^[2] As per the GST scheme, the Union government collects these IGST proceeds and apportions them to the consumption-based states in the manner stipulated in section 17 of the IGST Act.

Federal Misstep in the Apportionment of Proceeds u/s 17 and 18 of the IGST Act

As per the GST scheme, all inter-state supplies of goods and services are governed by and subsumed under the ambit of IGST, whose proceeds are collected by the Union but transferred to the consuming states. Section 17 under Chapter III of the IGST Act governs the manner in which the Union apportions IGST proceeds with the States. Most importantly, notall of the IGST proceeds are devolved to the states- in respect of inter-state supply and importation of goods and services where Input tax credit (ITC) cannot be claimed by the supplier or has foregone to claim IGST within the time stipulated u/s 49 of CGST, such share of proceedings will be retained by the Central government, thereby outside the share of states devolution. Clause (2A) was further inserted vide an amendment in 2018, which further carves out a 50% share of those proceeds that are not apportioned either under to the Union or to the states under clauses (1) and (2), to be shared with the Central government.^[3] The serious lacuna herein is contained u/s 18(c) of IGST, as per which the amount collected as IGST before getting apportioned to the States u/s 17(2) shall be reduced by an amount equal to the ITC claims made by the suppliers. While Section 17 only lets the state receive ITC-linked B2B component of IGST proceeds, a considerable share of those devolutions must now be foregone in the form of ITC, thus denting States' revenue. While a transition from a VAT-based regime to GST on petrol and diesel is per se, as shown above, tinkering with fiscal federalism claims. If all these products are subsumed under GST, its operation would further create tensions that states are now putting forth, thereby a glaring federal misstep.

The Blame Game: Unveiling the Union's Hidden Stake in the GST Fuel Debate

Despite such serious and bonafide repercussions on the state finances that are being at stake, the Union government and its officials tend to portray that the Central government is committed to reducing fuel prices and has no objections to bringing Petrol and Diesel under the GST radar, and they are only the states, especially opposition-party ruled states that are objecting to reducing the fuel prices. The Union has portrayed that the Centre does not get much due to the increased international crude oil prices since most of its tax rates are lumpsum or flat, and the burden on end consumers is due to the indeterminate, unequal and arbitrary levies. However, a deep dive into the revenue receipts of the Central government reflects that the true picture is otherwise. The flat excise duty levied @ Rs.19.90/litre of petrol and Rs.15.80/litre of diesel amounting to ₹2,73,683 crore, account for 11.8% of the Net tax revenue receipts of the Union in FY 2023-24. Moreover, India relies over 87%of its total crude oil needs on imports, on which the Union levies Rs. 2/metric tonne+ ₹50/mt as National Calamity Contingent Duty (NCCD), along with 2.5% basic customs duty+ ₹5/ltr+ ₹15/ltr countervailing duty on Imported Petrol and branded Diesel. Overall, taxes and duties on Crude oil & Petroleum products amounting to Rs. 3,50,086.4 crores account for 15% of the Net tax revenue receipts of the Union in FY 2023-24, which is equivalent to the previously explained 11-17% of the states' own tax revenue. Credit rating agency ICRA had noted in 2022 that the Central government would have to forego  Rs 92,000 crore worth of revenue in FY23 to restore excise duties on petrol and diesel to pre-pandemic levels, at which level the prices were equivalent to what the reduced prices would be if subsumed under GST. This data, therefore, clearly replicates the quintessential fact that the Central government would equally lose if Petrol and Diesel were subsumed under GST, and the partisan claims of its officials blaming the state governments are mere political rhetoric.

Robust Compensatory Mechanism: The Bridge to Cooperative Federalism

Having identified the serious macro-level problems associated with the inclusion of petrol and diesel under the GST ambit, it is an undeniable plight of the end consumers on the hefty tax burden that is being levied upon them, especially adversely affecting the household costs of the middle class. There is no justification for any government to impose a tax on the commoners under the garb of providing welfare schemes to the very commoners. Such a claim is self-defeating, which is evident from a survey finding that 77% of the public is vouching for Petrol and diesel to be included in GST. This concern reached its pinnacle when the Kerala High Court directed the GST Council to take an appropriate decision on a representation seeking to bring petroleum products under the GST regime within six weeks.^[4] While the 45th GST Council meeting took up this matter, no decision could be taken due to the vehement opposition from the state government representatives.

Therefore, the need of the hour is to bridge the macro-level fiscal federal concerns by ensuring that states' revenue loss is met by relying on effective alternative compensatory mechanisms. In this regard, solutions lie in the problems themselves that are identified above. The first solution lies in altering the apportionment mechanism of IGST proceeds u/s 17,18 of the IGST Act to ensure that both the Union and States equally bear the entire IGST proceeds and the ITC refund claims tied to it. Since Customs duties are allowed to be concurrently levied alongside IGST as per Section 3(7) of the Customs Tariff Act 1975, and since the same are not subjected to be devolved to the states, sufficient elbow must be conferred on the states in gaining majority share in IGST proceeds. The second compensatory mechanism is to provide an equal share to states in the proceeds from windfalltaxes that are consistently being imposed on the OMCs since the COVID-19 times, which is currently outside the ambit of the common revenue pool through which states could get a share. While these are only the minutest modes of appeasing the states, any other such form of clearly specified compensatory schemes would ensure transparency and a meaningful realization and adherence to the principle of cooperative federalism that is at the heart of the very concept of GST.

In the medium and long run, the GST usurps states' rights by rendering state governments incapable of deciding their own tax policies. When states cannot choose between sources of revenue to fund policies and projects of their choice, they become mere units of policy execution and administration and, in essence, reduce state governments to glorify bureaucracies. Even the recent 9-judge bench ruling of the Supreme Court in MineralArea Development Authority v. Steel Authority of India affirmed that “the power of the States to levy taxes within the domains assigned to them by the Constitution cannot be diluted. If the States' powers are curtailed, it will affect their ability to raise revenue for the welfare of their people.” Once petrol and diesel are brought under the GST ambit, ultimately, arm-twisting of states' representational autonomy in the GST council would have threatening consequences if the Union unilaterally slashes rates below 28% or takes any adverse measures. Therefore, an analysis of the fruitfulness of inclusion into GST must be analysed from a larger and very institutional structure and composition of the GST along with the inherent problems of GST collection shortfalls, etc. The extent to which consumer welfare is balanced against the macro-level fiscal federalism claims will ultimately reveal how effectively the tool of cooperative federalism is exercised and upheld by both the Union and State governments, in the absence of which the entire exercise only operates on shaky and faulty grounds. An actual and substantive application of Cooperative Federalism, as a principle, can be reflected in how this debate will be settled in the future.

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