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Petroleum under GST regime:

The Constitutional Amendment Bill on Goods & Services Tax (GST), recently cleared by the Cabinet provides that petroleum & petroleum products viz. petroleum crude, high speed diesel, motor spirit (petrol), natural gas, aviation turbine fuel initially shall not be subject to levy of GST till notified at a future date on the recommendation of the GST Council. So, we have a situation where even though petroleum products have been constitutionally brought under the ambit of GST but it has been left to a statutorily empowered GST Council to decide on the levy of Goods & Services Tax on them at a later date. Till that time, the current regime of taxes, duties & levies will continue on petroleum crude & petroleum products even as GST gets implemented for all other products & services, except liquor.

The GST Council will comprise of the Union Finance Minister (as Chairman), the Union Minister of State in charge of Revenue and a Minister nominated by each state government.

Petroleum taxes:

It is now expected that the general rate of tax on Goods & Services under GST regime may well be stipulated below 20%. Compared to this, petroleum products at present undergo a total tax levy of about 45-52% in the form of Customs duty, Excise duty, Cess, Service tax, Entry tax & VAT etc. The downstream petroleum sector makes a huge contribution to the State & Central Exchequer by way of these taxes & levies. Let’s have a look at the taxes & levies imposed by State & Central Governments on petroleum products under the present tax regime and the contribution to exchequer arising from these taxes:​

Contribution of Petroleum Sector to Exchequer by Taxes, Duties & Levies: FY 2014-15

Cascading taxes:

The amount of taxes & duties collected by government through petroleum products is a very significant portion of their total revenue realization. Besides the heavy dose of taxation under the current tax regime, cascading impact of taxes also happens on petroleum products because of levies like purchase tax & entry tax on petroleum crude imposed by some of the States for which no tax credit is allowed on finished product. Thus it is the Oil Refiners who have to absorb the additional cost of such levies wherever the prices are regulated. In a free pricing scenario, the consumer may be the sufferer as the Oil producer pass on the additional tax cost to them in their prices.

Petroleum Taxes - A cash cow:

Current regime of Taxes on petroleum provides an ear marked & easily available source of revenue of great magnitude for the government. Under the circumstances, States may not feel a pressing need for bringing about efficiency in tax realization & compliance to increase their revenue. Some of the States earn as much as 35% of their total revenue through taxes on petroleum products. No wonder the States fear that inclusion of petroleum & petroleum products in GST regime would cause a loss in their revenue and have therefore been insisting on their exclusion from GST and continuance under existing tax structure

Loss of revenue under GST – fears unfounded:

However, fears of loss of revenue may be unfounded as the global experience suggests that the tax revenue actually increases in GST regime through a more effective enforcement & monitoring of tax compliance and as more players in the supply chain get identified in the GST regime and are brought into the tax net. Therefore, if the States follow the global experience of transition to GST and broad base the tax structure besides improving efficiency & tax compliance, there is no reason why they should face any loss of revenue by bringing petroleum products under GST.

A peculiar situation will emerge under proposed regulations:

If the proposals in the Bill are implemented as they are, petroleum products will continue to be subjected to current taxes such as Excise duty, VAT, Cess, Service tax, purchase tax & entry tax etc. till notified for inclusion by the GST Council at a later date, which is not likely to be soon. However, Product & Services other than petroleum will shift to GST regime. This will give rise to a peculiar situation whereby petroleum sector may not be able to avail tax credit for the Goods & Services Tax paid on purchase of capital goods, other products & services. The overall impact may be quite significant and will increase the tax cost of petroleum products materially. On the other hand, customers who purchase petroleum products will also not be entitled to avail tax credit for taxes paid by them on purchase of petroleum products that may otherwise have been available, in some cases.

The least which can be done in the transition time:

The proposed legislation needs to be re-examined for taxation on petroleum products and tax credits. The least which can be done is to bring about tax reforms to ensure that these taxes do not have cascading impact and tax credit is allowed for the GST paid by petroleum sector on procurement of capital goods, products & services as well as for tax paid by customers on purchase of petroleum products, wherever it is eligible.

The ideal solution shall, however, be to bring petroleum products also within the scope of Goods & Services Tax regime like all other products & services with improved efficiency in monitoring, tax compliance & tax credits, ensuring at the same time that there is no increase in the tax incidence on the transactions..


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Category Service Tax, Other Articles by - CA. Rajvir Bhatnagar 



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