Why Petrol, Diesel, and Electricity are Over-taxed Under GST

Introduction

One common question from consumers and businesses alike is whether petrol, diesel, and electricity are exempt from the Goods and Services Tax (GST) in India. In reality, these products are not exempt but over-taxed, with the tax amount often being almost double the maximum permissible under GST.

Petrol and Diesel as Main Sources of Government Revenue

Both petrol and diesel are significant sources of tax-based income for the Indian government. The retail price of petrol without taxes is around 34 rupees, while the fully taxed price can reach up to Rs 81 in cities like Mumbai. This means that consumers are paying nearly 150 rupees more than the retail price on top of the taxes. The current highest tax slab under GST is 28%. When petrol and diesel are included in GST without adding a new higher tax slab, it would result in a significant revenue loss for the government. Therefore, the government is considering introducing a new highest tax slab.

The Current Tax Structure

Currently, petrol is subject to 23% central excise duty and around 27% VAT for the state, totaling approximately 50%. Diesel is subject to 23% central excise duty and 16.75% VAT for the state, totaling nearly 40%. These current tax rates are close to, if not exceeding, the maximum permissible tax limit under GST, which is 28%. Thus, the price of petrol and diesel must be adjusted to bring them within the GST limit, which would create a substantial loss in government revenue.

Electricity and Its Taxation

Electricity, a critical input in production processes, remains under-taxed in comparison to its importance. Unlike petrol and diesel, the tax treatment for the power sector has not been rationalized to correlate with its significance in production. As a result, the cost of electricity remains high, affecting various industries.

Electrification and GST for India's Electricity Sector

Integrating the electricity sector into the GST scheme would be a significant step towards reducing the cost of power projects. This would lead to a decrease in the cost of generation and distribution of electricity. Lower electricity costs would stimulate Indian industries and improve their competitiveness in the international market. However, the cost for non-commercial units, such as home power bills, may increase.

Conclusion

The government has indicated that petrol and diesel would soon be included in GST, but only with an additional new highest tax slab. This change is crucial for rationalizing the tax policy for essential resources like petrol, diesel, and electricity. However, it must be balanced to ensure minimal disruption to the economy and maximize benefits for national industries in the long run.