Budget 2024: Fuelling Change Or Fuelling Debate?

The inclusion of petrol and diesel under the Goods and Services Tax regime would be a game-changer in India's taxation regime. Since its inception in 2017, “One Nation, One Tax” has been the Centre’s refrain. However, petrol, diesel and a few other petroleum products (such as aviation fuel), have been kept out of GST. Petrol and diesel continue to be taxed by excise duty levied by the Centre and value added tax levied by the States.

Historically, petrol and diesel has always been subject to a shared taxation regime. The Centre with its excise duties and the States with sales tax (and later value added taxes). Input tax credit of the excise duties was never available to be adjusted against the value added tax and was hence a cascading cost that was passed onto the consumers.

Like with alcohol, taxes collected on petrol and diesel form a significant portion of the States’ revenue. For e.g., Maharashtra collected Rs. 36,359.3 Crores in FY 2023-24 on the sale of petroleum products. This was the primary reason why petrol and diesel were left out of the GST regime in 2017. The States were unwilling to share the tax revenue on petrol and diesel with the Centre and bear the associated loss of revenue. 

Currently, depending upon the State, 40-50 per cent of the cost of petrol and diesel that a customer bears is due to taxes. Excise duty is an embedded cost and value added tax is directly charged by the States on the sale of petrol and diesel. If petrol and diesel were to be included into GST, there would be a host of benefits. Firstly, unless the Government chooses to introduce a new tax slab, the maximum taxation that the consumer would face would be 40 per cent. Secondly, tax compliances for businesses would be easier with reduced returns to be filed. Thirdly, availability of input tax credit would improve cashflow and reduce the burden on the consumer. Lastly, administration and collection of taxes itself will be easier for the Government since the fine-tuned GST portals and technologies would become available.

Challenges in implementation

Currently, the law mandates that it is the GST Council which will determine the date from which petrol, diesel and other petroleum products would be included within GST. Every decision of the Council is to be taken by a majority of not less than three-fourths of the weighted votes. The Centre has a weightage of one-third of the total votes cast in the meeting. The States hold a combined weightage of two-thirds of the total votes.

With the States being unwilling to suffer a major hit to their revenues and in the wake of the political gains made by opposition parties in the 2024 General Elections, it currently appears to be a difficult task for the Centre to convince the States and reach the required three-fourths majority. Another hurdle to be overcome is the requirement of amending the legislative Entries in the Constitution. While some may argue that a Constitutional amendment is not necessary, without one there is no certainty that the States stop imposing value added tax on petrol or diesel. A Constitutional amendment would require a two-thirds majority in Parliament and a ratification of atleast one-half of the States. This is also a significant challenge in the current political climate.

All in all, the proposal to bring petrol and diesel under the regime of GST espouses a vision of a more integrated tax system, one that is easier to administer while giving great benefits to the consumers. However, to achieve this unified taxation, the Central Government will have to traverse low political will, concerns over sharing of revenue between centre and state and then surmount the possible amendments to the Constitution of India.

This article is co-authored by Charanya Lakshmikumaran, Executive Partner, S Sriram, Partner and Sahil Parghi, Associate Partner at Lakshmikumaran & Sridharan Attorneys