Union finance minister Nirmala Sitharaman was speaking on behalf of most Indians on the biggest reform they would like to see implemented immediately when she spoke of the Central government, under Prime Minister Narendra Modi’s leadership, being willing to bring petroleum products, including petrol and diesel, under the ambit and framework of the Goods and Services Tax (GST), if a consensus could be built around it amongst the participating states and the GST Council passed the move.
India taxes petrol at both the Central and state levels, and together, they make petrol and diesel amongst the highest taxed and most expensive in the world when compared with equivalent societies and economies. The GST must expand its horizon and include petroleum products, but the issue has several contentious sides.
First, it is an issue of our federal structure. India is a quasi-federation, not a perfect federation like the USA, and it gives Centre huge power over the states, varying from legislative through the instrument of concurrent lists, or finances, in which states varyingly but invariably depend on the Centre for their financial viability.
The Modi government has been trying to strengthen our economy, and strongly unify and integrate our society through the creation of uniformity in several areas — one economy, one tax; increasingly one market; one ration card, among others. However, the states, more specifically the non-BJP ruled states, have been up in arms politically, calling it an attempt to weaken the federal structure of the country and reducing the power of states.
India does not have a rating or grading of states based on their financial situation, save for their own independent budgets but it would be easy to conclude all of them depend heavily on the taxation on petrol, being a range of products whose market comes with great demand elasticity and near zero purchase resistance to pricing.
In such a scenario, most states, including the BJP ruled ones, would be resistant to losing power to impose, change or hike taxes on petrol — which would be the result of bringing it under the GST ambit. States would seek compensation for the loss of revenue, but that too would be for a short term, and in the long-term, all states would lose a sizable chunk of revenue.
The other issue would be the rate of taxation. Currently there are four sets of GST rates and all products and services are divided into these four blocks, with the states and Centre sharing the total tax. Even if petrol, diesel and others are brought into the highest slab of 28 per cent, both Centre and state would lose a huge portion of revenue; but citizens would gain, and the economy would benefit from lower levels of inflation.
So the state representatives in the GST Council must resist any move to introduce a higher slab of taxation, even as they move the petroleum products into its ambit.
The Centre has given a great vision and it is now its moral responsibility to build a consensus amongst all, and address the grievances and concerns of all states and UTs, before bringing in the reform.
But citizens deserve petrol pricing in India to be on parity with other developed and growing nations.