Impact of Introducing Petrol and Diesel Under GST: Unrealistic Expectations or Real Economic Concerns?
The notion that introducing Petrol and Diesel under the Goods and Services Tax (GST) would lead to a significant reduction in item prices is often met with skepticism. According to recent government policies and economic analyses, this expectation is misguided.
Disproportionate Impact of Oil Cess
Unlike the inflated rhetoric and expectations, the introduction of Petrol and Diesel under GST will not directly result in lower prices for consumers. Instead, the financial impact of bringing these fuels under the GST regime will be mainly seen as an increase in a taxable cess, rather than a direct price reduction. The government's intention is more about streamlining the tax system rather than reducing costs for consumers.
No Expected Price Reduction
Contrary to popular belief, there are not any realistic expectations of a price reduction due to this change. The main aim is to simplify and make the fuel industry's compliance with tax rules easier. GST is expected to reduce their tax-related paperwork, but it does not imply a drop in item prices. This change is primarily about easing administrative procedures and reducing compliance costs.
Understanding the GST Tax Calculation
Under the current GST framework, if the base price of an item is known, one can easily calculate the GST. With a peak GST rate of 28%, half of that (14%) goes to the central government, and the other half goes to the state government. Consumers can use this knowledge to estimate the total tax they will pay on a specified product, making the tax system more transparent and understandable.
Economic Implications and Subsidy Issues
The essential question about whether introducing Petrol and Diesel under GST would lead to a decrease in item prices is misguided. In India, Petrol and Diesel had different economic roles and regulatory statuses in the past. Petrol was deregulated in 2010, while Diesel followed suit in 2014. Previous subsidies for Diesel significantly impacted the economy and were discontinued. Holding onto subsidies is unsustainable as the deficits must be recovered from other sources, often through increased taxation elsewhere.
Integrating Petrol and Diesel under GST brings significant challenges. Currently, the government earns approximately 1.5 lac crores (approximately 15 billion USD) annually from taxing these fuels. This substantial revenue would drastically reduce if brought under the GST. The government faces three unfavorable options to address this revenue shortfall: curtailing development expenditure, increasing inflation through more currency issuance, or increasing taxes on other goods to cover the shortfall, which would lead to higher prices.
Political opposition often creates a hue and cry for their political gain, but in an open economy, keeping prices realistic is the best available option. Economic realities dictate that maintaining sustainable fiscal management is more crucial than short-term political gains.