Why the Indian Government Chooses Not to Implement GST on Petrol and Diesel

The implementation of Goods and Services Tax (GST) in India has greatly simplified the tax system, but the question arises as to why petrol and diesel have been excluded from this reform. This article explores the multifaceted reasons behind this decision, examining the impact on tax revenues, the socio-economic situation, and the governmental intent.

Impact on Tax Revenues

One of the primary reasons for not implementing GST on petrol and diesel is the significant impact on tax revenues that such a change would have. The Goods and Services Tax (GST) is designed to replace multiple taxes that are currently levied at different stages of the supply chain. However, if GST were to be applied to petrol and diesel, two of the largest sources of state and central government revenues, a substantial revenue loss would occur. Here’s a breakdown of why this is a concern:

VAT Removal: If GST is levied, the Value Added Tax (VAT) on petrol would be removed. This would directly impact state governments, as they lose a substantial source of revenue. States rely on these taxes to fund numerous government schemes and services. Excise Duty: The Excise duty on petrol would also be removed if GST were implemented, further reducing central government revenues. Central governments currently pay around 42% of their revenues to states, making such a change highly undesirable. Tax Rate Limitations: The current GST rate is limited to 28%. To raise it to a revenue-neutral rate, the rate would need to be increased to more than 100%, which is not feasible. Additionally, the Input Tax Credit (ITC) on petrol would need to be blocked, further complicating the issue.

Socio-Economic Considerations

Beyond the financial implications, the socio-economic situation in India plays a crucial role in the government's decision to avoid taxing petrol and diesel heavily. Here are some key points:

Subsidies and Welfare: The Indian government heavily subsidizes fuel for poorer sections and farmers, who constitute a majority of the population. A significant increase in fuel taxes would directly affect these groups, causing social unrest. Political parties are hesitant to implement such policies, as it could risk losing election seats. Economic Dependency: India does not produce its crude oil, necessitating significant imports. High taxes on petrol and diesel would act as a disincentive to consumers, impacting the trade balance and foreign exchange rates. The country relies on oil imports for energy security, making them a necessity. Transition to Renewables: As part of its broader goals, the government is encouraging the transition to electric vehicles (EVs) and has provided tax subsidies for them. This move is aimed at reducing dependency on fossil fuel and addressing the high costs associated with petrol and diesel.

Current Status and Future Outlook

The current government is moving towards reducing the consumption of petrol and diesel by promoting EVs. However, the implementation of GST on petrol and diesel faces significant barriers. Here’s what the future may hold:

Improvement in Efficiency: For substantial changes to occur, the government must first address issues of inefficiency in the current system. Only then can the removal of subsidies and the implementation of GST be considered. Economic Reforms: As the economy and tax base become more efficient and robust, the possibility of implementing GST on petrol and diesel may increase. However, this will require significant political will and public support. Transitional Support: In the meantime, the government is focusing on the transition to renewables and improving the overall economic landscape. This approach aims to address long-term issues associated with fossil fuel dependency.

In conclusion, while the implementation of GST on petrol and diesel may seem beneficial in terms of increasing revenue, the socio-economic and political implications make it a complex issue. The government's focus on reducing fuel taxes reflects a commitment to supporting the majority of the population and promoting sustainable energy solutions.