India opts to keep high taxes on motor fuels

India has again decided not to bring gasoline and diesel under its national Goods and Services Tax (GST) regime, passing on the chance to significantly reduce a tax burden that is weighing on demand for the fuels.

The finance ministry decided late last week to keep motor fuels exempt from GST, given the substantial loss of revenue for central and state governments that would result from a change.

"GST council felt that it was not the time to bring the petroleum products into the GST," finance minister Nirmala Sitharaman said following the GST Council meeting on 17 September. The council considered including oil products in the GST regime after the Kerala High Court ordered it to discuss the issue.

GST, an indirect levy on the supply of goods and services, amalgamates state and central taxes into one regime. Crude oil, diesel, gasoline, natural gas and jet fuel have been excluded from GST since its inception in 2017. The levy on biofuels, which are included in GST, was reduced at the latest meeting.

Any move to apply GST to motor fuels would potentially cut taxes by around half. Under the current system, gasoline and diesel are subject to a number of different taxes, including the central government's excise duty and value added tax (VAT) applied by states, which together make up around 60pc of the retail price. GST, on the other hand, is capped at 28pc.

The high tax burden, together with rising global oil prices this year, has helped send Indian motor fuel prices to record levels, depressing demand.

But authorities are reluctant to give up the revenue they reap from taxing the fuels. The south Indian state of Kerala would lose about 80bn rupees/yr ($1.08bn/yr) if gasoline and diesel were to be brought under the GST, the state's finance minister KN Balagopal said. Many other states also opposed the idea of bringing motor fuels under the regime.

Excise duty and VAT accounted for about 55pc of the retail price of gasoline and 50pc of diesel as of 1 August, according to oil ministry figures. Switching the tax regime to GST, even at the maximum rate of 28pc, would reduce gasoline prices by around 44pc to Rs57/l from Rs101.84/l, according to Argus calculations.

Retail diesel and gasoline prices are holding near all-time highs, with diesel being sold at Rs96.19/litre in Mumbai yesterday and gasoline retailing at Rs107.26/l.

Demand for gasoline rose above pre-pandemic levels to 576,000 b/d in the first half of this month, up by 8pc compared with the same period two years earlier, supported by an increase in personal transport, while diesel consumption was at 1.04mn b/d in the first two weeks of September, still down by 7pc compared with the same period in 2019, on higher prices and a monsoon-induced fall in trucking.

By Sathya Narayanan