Introduction

GST Applicability

Overview of GST:

GST is a destination-based tax system that subsumes various indirect taxes like VAT, excise duty, service tax, and more. It is designed to create a unified and simplified tax regime. Under GST, the tax is levied at every stage of the supply chain, and the input tax credit mechanism ensures that tax paid at earlier stages is available as a credit for subsequent stages.

Petroleum Sector Under GST:

The petroleum sector is a critical component of the Indian economy, given its contribution to revenue, energy, and employment. However, it presents unique challenges for GST implementation. When GST was introduced, petroleum products were kept outside its purview, which means they were not subject to GST initially.

Exclusion of Petroleum Products:

Petroleum products, including crude oil, natural gas, diesel, petrol, and aviation turbine fuel (ATF), were initially excluded from GST to prevent significant revenue losses for both the central and state governments. This exclusion was primarily due to the high dependence of the government on revenue from these products.

GST on Other Inputs and Services:

While the end products like petrol and diesel are outside the GST ambit, various inputs, raw materials, and services required by the petroleum and oil industry are subject to GST. This includes goods such as machinery, lubricants, chemicals, and services like transportation and storage.

Complications Due to Exclusion:

Excluding petroleum products from GST has led to complications such as the inability to claim input tax credits on various inputs and services used in the industry. This results in cascading taxes and an increase in the cost of production.

Tax Rates on Petroleum and Oil Products

Current Tax Structure:

GST Council Discussions:

The GST Council, a body comprising representatives from the central and state governments, periodically reviews the possibility of bringing petroleum products under GST. However, due to revenue concerns and the political sensitivity of fuel prices, this transition has not occurred thus far.

GST on Natural Gas:

In September 2020, the GST Council decided to impose GST on natural gas. This marked a step towards integrating the petroleum sector into the GST framework. The applicable GST rate on natural gas was 5% at that time.

GST Rate Changes:

It's important to note that GST rates are subject to change based on government policies and economic conditions. 

Challenges and Benefits of GST for the Petroleum and Oil Industry

Challenges:

a. Revenue Concerns: One of the primary challenges in bringing petroleum products under GST is the potential loss of revenue for both the central and state governments. These products are a significant source of tax revenue.

b. Complex Tax Structure: The petroleum industry operates across state boundaries, and the existing state-level taxes lead to a complex tax structure. Transitioning to GST requires resolving issues related to inter-state transactions and uniform tax rates.

c. Impact on Retail Prices: The price of petrol and diesel is a politically sensitive issue in India. Bringing these products under GST could lead to fluctuating retail prices, which might be politically unpopular.

Benefits:

a. Simplification: GST aims to simplify taxation, and bringing petroleum products under its ambit would streamline the taxation process for the industry, reducing compliance burdens.

b. Input Tax Credit: Integration into GST would enable the petroleum industry to claim input tax credits on various inputs and services, reducing the overall cost of production.

c. Uniform Tax Rates: GST offers uniform tax rates across the country, promoting a common market and reducing tax arbitrage opportunities.

d. Transparency: GST promotes transparency in tax collection and reduces tax evasion, which can benefit both the government and the industry.

e. Improved Business Environment: A uniform tax regime would create a more predictable business environment, potentially attracting more investments in the petroleum and oil sector.

Conclusion

The inclusion of the petroleum and oil industry under the GST framework is a complex and contentious issue in India. While the industry faces challenges related to revenue concerns, tax structure, and retail prices, there are also potential benefits in terms of simplification, input tax credit availability, and a more transparent business environment. The decision to bring petroleum products under GST requires careful consideration of these factors and a balance between fiscal requirements and economic reform.