Council to discuss bringing petrol and diesel under GST

These loans are to be repaid via cess proceeds. The cesses on demerit goods are being used for compensating states for revenue shortfall against the guaranteed annual growth of 14%.

Amid a raging row over the hefty taxes on petrol and diesel, the Goods and Services Tax (GST) Council will deliberate on Friday on bringing petrol and diesel under the GST regime even as it is set to sort out the vexatious issue of whether and how to compensate states for any GST revenue shortfall beyond June 2022, sources told FE.

The Council, which will meet physically in Lucknow, will also likely take a call on whether GST concessions for various Covid medicines and related medical equipment, which are to be valid till September 30, should be extended. The sources said that the Council will likely debate on the ‘streamlining’ of GST rates correcting inverted duty structures.


As per Article 279A (5) of the Constitution, the Council shall recommend the date on which GST shall be levied on all excluded products, i.e., petroleum crude, high-speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel.

Recently, NITI Aayog held a discussion on transition of energy products into the GST regime with economists and industry experts where it is learnt to have proposed a formula whereby the two motor fuels and electricity could be brought under GST in one go, without causing much Centre-state tussle. According to the think-tank’s formula, the Centre would compensate the states for potential revenue losses on account of shifting electricity — which is currently being taxed by the states exclusively — to GST for about six years.

Given that the Centre will require to make a bigger revenue sacrifice than the states for the plan because of its current very high tax rates on petrol and diesel, the compensation offer could be used as a bargaining tool for securing the states’ consent for the plan, NITI Aayog feels.

Many states are unhappy with the GST system as it hasn’t yielded the promised revenue productivity, though experts attribute this to flawed structure of the tax and the cuts in tax rates. These states lament the proven inadequacy of the compensation mechanism for their revenue loss. States in general are also apprehending a revenue shock once the five-year GST shortfall compensation period expires in June 2022, and are demanding an extension of the mechanism.

It will take 2-3 years to repay the Rs 1.1 lakh crore already borrowed by the Centre in FY21 to bridge the shortfall in the designated cess funds and another about Rs 1.58 lakh crore is to be borrowed in FY22, to compensate states for the shortfall in assured GST revenues. These loans are to be repaid via cess proceeds. The cesses on demerit goods are being used for compensating states for revenue shortfall against the guaranteed annual growth of 14%.

An extension of assured compensation mechanism might lead to fresh borrowings, creating additional liabilities requiring imposition of cess for much longer periods, hike in cess rates and/or imposition of cesses on more goods. The Union government officials are of the view that dependence on the cess or borrowings to bridge the revenue shortfall might not be the right way forward.

Under the current tax structure, the Centre and states collect taxes on the two motor fuels in the ratio of 6:4. Besides getting a 50% share in the GST on petrol and diesel, the states could also benefit from higher devolution, as the Centre’s 50% revenue from the fuels will also be part of divisible pool, against under 6% now.

The NITI Aayog is of the view that given a seamless input tax credit mechanism to be facilitated under GST, the industry’s post-tax profitability could increase, and result in substantial incremental growth in the government’s direct tax receipts. Of course, the Centre’s revenue could see a decline at the start of the proposed regime, as it will be difficult to levy a revenue-neutral GST rate on petrol and diesel under GST. The RNR is seen to be very high, given the current excise duty structure.

So, the Centre could favour keeping petrol and diesel at the highest slab of 28%, levy a cess at the rate of 50% or more to compensate states for inclusion of electricity duty in GST and also cover part of its losses due to transition of the fuels into GST, according to the think-tank. Compensation to states on account of losses on electricity duty might be brought down by 20% in each year. As the compensation gradually goes down, the Centre would appropriate a higher proportion of the cess proceeds.

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