Pricing of Petroleum India and Issues around Uniform Tax
As the states sit down to prepare a uniform tax regarding petroleum, it is important to see what is GST and how has it affected the petroleum sector.
Goods and Services Tax
GST launched in the midnight hour of 31st June 2017, it is a uniform one nation one tax system which subsumes all other taxes levied on goods and services into two kinds of taxes. One is levied by state (state GST or SGST) and the other by centre (Central GST or CGST). There is a third type which is collected for inter-state sale called IGST. It aims to create one economic market in India. Earlier, tax was levied on each level of manufacturing and sale process. It made the manufacturer pay tax again and again on the same article at multiple steps of its production which ultimately increased the price of the finished product. In the new tax regime a person can demand an input credit on the product for already paid taxes.
Input credit
It is the feature by which a company or a manufacturer can claim the additional tax which he had to pay in the process of manufacturing on the inputs time and again after already paying it once. He can do so by showing the invoice as a proof of tax being paid and after acquiring a GST tax number.
Earlier, each state had the liberty of levying some kind of taxes by themselves on goods and services which created a lot of confusion for companies that were setting up their businesses in different states as they had to pay varying taxes in each of them. Due to uniform tax being implied on the whole country, ease of doing business has improved. However some articles were excluded from this tax regime which includes petroleum.
Why exclude petroleum?
Petrol or diesel form the largest source of revenue for states as well as centre. Taxes on them contribute to nearly 33% of the state revenue and 23% of the centre’s revenue making it a total of 56%. The central excise duty and value added tax are the taxes imposed on the commodity by centre and state respectively. Under GST this tax revenue would have come down to 28% which is the upper limit in it, with centre and state’s tax share being 14% each. Till the time the states’ economy would have become accustomed to the new changes, they wanted their biggest source income to be secured.
The centre has been interested in including petroleum under GST but the states who form a major part of its revenue couldn’t agree upon it. But eventually, the states have now agreed to devise a uniform tax structure for petroleum as well
Problems arising due to it
Form C is issued by a registered dealer to a seller of goods in the case of CST so as to charge a lesser sales tax from it. The Central Sales Tax act 1956, defines the kind of goods against which a C- form can be issued. Issuance of a C-form allows a dealer to charge 2% less on a good if it is sold to another dealer in another state. According to the act, petroleum qualifies for such an issuance if it will be used for generating power but if it is purchased for the processing in manufacturing it does not qualify for the 2% concession. This takes the manufacturing sector out of the purview of availing the benefit of the concession instead of VAT levied locally in the state. Earlier, it was suggested that CST act should be amended so that the production and manufacturing cost does not increase rapidly. Also the VAT that was earlier claimed as a input credit was not available in current scenario leading to rise in the costs.
The matter has been made worse by some states as some of them have introduced an entry tax on the petroleum products so that dealers avoid the 2% concessional way as they fear that they are going to buy products from other states at the concession and therefore will not pay the local VAT.
The Tax
This could turn disastrous for the manufacturing industry which not only has to pay higher taxes but are also devoid of the choice of input tax credits. This could turn counterproductive leading to lesser investments and job creation.
So the states have initially decided to cap the VAT at 5% along with lowering it down for others like petroleum, diesel which are used as an input in the manufacturing industry. The GST council will take the final decision of approving or rejecting the proposals but as the petro based products affect the revenue of the states the most, centre has decided that it would be best if they can decide upon a common tax reduction for them which could applied nationwide.
When amending the CST act has gone out of option, the only way out is the reduction the VAT introducing a possible uniform VAT and provide a starting step to include petroleum into GST in later years.
