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Should petrol and diesel be brought under GST?
In addition to GST, India can impose an excise tax on petrol and diesel and share part of these revenues with the states.

While petroleum products like LPG, kerosene, and naphtha are under the ambit of GST, five products namely crude oil, natural gas, aviation fuel, petrol and diesel, are kept out of it. The reason for this is that these commodities are cash cows for the governments. However, with planning, they could have also been brought under GST. 

In 2016-17, states and the Centre earned total revenues of Rs. 4.1 lakh crore as shown in Figure - 1 which form a significant portion of total tax collections. 

Central excise and state sales taxes account for a high percentage of the total retail price as shown.Excise and sales taxes account for 51.8 per cent and 44.3 per cent of petrol and diesel prices sold in the retail market. These rates are considerably higher than the maximum GST taxes rate at 28 per cent. No wonder, the government was hesitant to bring petrol and diesel under GST. 

However, like in other countries where there is VAT, to cover both petrol and diesel, every government has succeeded in getting higher revenues from them. In addition to VAT rate of 15 per cent or 20 per cent, they also levy excise duties. India also could have adopted a similar strategy. 

Maha Vat on petrol at 47.6 per cent

Of course, states would have still raised objections. They were apprehensive of losing freedom of raising revenues from these two products. Most states have a sales tax or VAT of less than 28 per cent for petrol.  In the case of diesel, only two states have a rate higher than 28 per cent . 

Both the Central and state governments have been aggressive in increasing taxes on petrol and diesel. State governments did not want to give up that power. However, with the success of GST, in coming years the GST Council may be able to convince the states to accept the suggestion of bringing petrol and diesel under GST. 

Rationalise through GST but levy excise

In recent years, to fight climate change, there is the urgent need to reduce greenhouse gases. One way to achieve that is to lessen the consumption of petrol and diesel by imposing taxes on them. So India can justify imposing an excise tax on gasoline and diesel and part of these revenues can be shared with the states. 

Leaving products like petrol and diesel from out of the GST net complicates the tax collection system. For example, a refinery that pays GST for procurement of plant, machinery, services will not be able to claim credit against the excise and sales tax paid on petrol and diesel.  For this reason also the earlier we bring gasoline and diesel under the ambit of GST, the better it will be. 

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