The 2016 game-changing constitutional amendment to facilitate introduction of GST
was described as a “grand-bargain”. The states agreed to “cede” their exclusive sovereignty to tax supply of goods inter alia
in lieu of a constitutional assurance that the Union shall compensate them for five years “for loss of revenue arising on account of implementation” of GST.
In hindsight, as the GST
collections have revealed, this was not fear of the unknown. Indeed, majority of the states are availing of the compensation. There is a catch-though. The compensation is pegged based on FY 2015-16 collection and assures year-on-year 14 per cent incremental revenue to the states. In a sense, therefore, “loss of revenue” as a precondition is a misnomer given the Union guarantee to compensate even for states failure to meet growth projections. The 14 per cent growth in tax revenue is far ahead of the economic curve, even without the Covid-19 crises. Nonetheless, all sovereign assurances must be fulfilled. A recent media report of central government disbursing Rs 20,000 crore of GST compensation, reaffirms that constitutional guarantees are sacrosanct. Given the enormity of Union’s burden, the health-crisis is a moment of reckoning and an opportune time to revisit GST policy-design.
Subsuming of petroleum products, firstly, is a low-hanging fruit as it does not require a constitutional amendment. If indeed revenue buoyancy and not a policy imperative, is the cause for its exclusion, such concern is misplaced. Even in the current design, the Constitution permits both the Centre and the states to levy excise duty and sales tax, respectively, in addition to GST. Thus, revenue shortfall can be addressed by the levy of such additional taxes with no obstacle to join the GST chain. This single move will substantially benefit the aviation and transportation industry, including manufacturing
sectors for whom fossil fuels form a significant cost component.
Though technically petroleum products have been deregulated in terms of price-fixation and government-controlled oil marketing companies determine its retail price, the ad-valorem basis of levy significantly pushes up the tax component when crude oil prices are low. Hence, it is de facto the government which continues to be the price-setter. It is therefore common that most reductions in global crude prices do not reach the consumers owing to simultaneous increase in taxes. This is a situation far from optimal considering that the very objective of deregulation, announced in October 2014, was to “facilitate greater competition in the auto fuels retail segment... expected to benefit consumers due to greater competition among oil companies... expected to foster greater efficiency in oil companies benefitting the consumers.”
A counter-narrative in favour of high taxes on petroleum is to address twin objectives of revenue buoyancy and fiscal deficit. This is supplemented by an argument that such products qualify as sin goods and thus high taxes dissuade their consumption. The latter argument is least convincing, though, there could be other economic and environmental imperatives to support higher taxation. The major nations have addressed such additional levy by way of carbon tax. India’s response on move to GST, as explained above, is embedded in the constitutional scheme, which permits additional taxes on petroleum products. Furthermore, other sin goods, such as coal, fast-foods, lottery, tobacco products, etc. are also within GST.
A bigger question facing the government is if it can afford to maintain such levies in a situation where economic revival is of paramount importance? When it comes to growth imperatives, the range of enquiry is beyond fossil fuels and extends to natural gas, LPG etc. Steep levies are bound to derail the budgets of industrial consumers and households alike with frugal profit and income levels, respectively. One may argue that deserving citizens will be cushioned with direct-benefit-transfer scheme and others can afford to pay. This argument fails as the petroleum tax structure is inefficient and regressive, particularly in the current economic environment and hence, deserves a relook.
The corporate rate cuts announced last September, though welcomed, could not invigorate investment and economic activity as was anticipated given that the economy was already in stress due to credit growth and manufacturing
woes. The urgent need of the hour is to boost consumption such that there is an incentive for investment in the manufacturing
and service sector.
There is yet another facet to this conundrum. It is becoming increasingly clear that fiscal stimulus will continue to expand for fast-track economic revival. Its objectives could not fructify with prevailing high tax on petroleum products and inefficiencies due to lack of credit mechanism. The burden of stimulus on central government will effectively benefit the states, whilst they maintain the current tax structure on petroleum products. In other words, stimulus earmarked for economic revival will be hived off, albeit partially, in the form of tax collection. In other words, the existing taxation policy on petroleum products is set to negate the economic revival. Conversely, if petroleum products are brought in the GST chain, states will undertake coordinated action under the aegis of GST Council
and not derail an important step in GST reforms.
Subsuming petroleum products within GST, besides addressing an unfinished reform shall boost GST collections
as economic revival gains momentum. This will make a compelling case for reducing the median GST rate, as consumption gathers speed. In summary, what is being advocated is a move to GST without interrupting the current effective rate structure, with the aid of constitutional mandate to levy additional taxes. Simultaneously, bringing states on board using the stimulus carrot and compensation sovereign assurance, which is valid until FY 21-22, makes it a compelling case. For the states to revive growth with high economic activity fuelled with stimulus from the Centre and consumption, GST being a destination levy, makes an even more compelling case.
Should the GST Council
push for this proposition and the states support, it will be illustrative of true cooperative-federalism ethos at play.
The author is managing partner, BMR Legal