Why Are Diesel and Petrol Prices Unaffected by GST in India?

The Goods and Services Tax (GST) introduced in India in 2017 was aimed at creating a unified national market and simplifying the tax regime. However, the fuel sector, specifically diesel and petrol, remains exempt from this tax, leading to some confusion and debate regarding its implications.

Tax Revenues and Corruption

One of the reasons for excluding fuel from the GST purview lies in the significant tax revenue generated from it. In India, fuel contributes immensely to the tax kitty, making it a major source of income for both state and central governments. This is a critical factor, especially when combating corruption and ensuring that revenue flows into legitimate channels. The lack of inclusion in the GST is sometimes perceived as a means to funnel money into corrupt systems, thereby undermining the benefits that GST was supposed to bring to taxpayers and businesses.

Bureaucratic Reasons and Revenue Concerns

Another crucial point is the bureaucratic and financial reluctance to implement GST on fuel. Typically, under GST, the highest slab rate is 28%, which is approximately half of the current taxation on fuels. Stakeholders along the supply chain would not want to lose out on revenue. Moreover, businesses dealing with fuels find it difficult to take credit for the input tax paid on goods and services used for daily operations. As a result, GST on fuels leads to higher revenue for the government, which is a substantial concern.

Political and Administrative Obstacles

The decision not to include fuel in the GST is also influenced by political and administrative reasons. The fuel sector, which is subject to state-level VAT (Value Added Tax), is a significant source of revenue for states. States do not want to forego this income, which is why they have not agreed to include fuel under the GST regime. The GST Council, a decision-making body comprising representatives from the central government and the states, has not approved this inclusion.

Central vs. State Revenue Structure

A key reason for the exclusion is the desire to maintain state-level revenue structures. State governments impose a higher VAT on petroleum products compared to central excise duties. By maintaining these structures, state governments can continue to benefit from their current revenue streams without altering the existing fiscal landscape. This has become a convenient strategy for states to maintain their control over taxation and revenue collection without confronting the central government, which is often criticized for its autocratic tendencies in fiscal policy-making.

Conclusion and Remedy

The main obstacles to including fuel in the GST are the immediate loss of revenue for states and the reluctance of the central government to give up its freedom to hike taxes as needed. To overcome these challenges, a special rate of 40% or higher could be considered. This would ensure that the states benefit proportionately when the central government increases the tax rate, thereby balancing interests and ensuring a fair distribution of tax revenues.