The GST zero rate bait

What is the polit­i­cal com­pul­sion for keep­ing GST on petro­le­um prod­ucts at zero initially?

States are appre­hen­sive of los­ing their auton­o­my over rais­ing tax rev­enue by tweak­ing VAT on petro­le­um prod­ucts once the pro­posed new indi­rect tax regime is intro­duced. Tax­es on petro­le­um are easy to col­lect and, there­fore, los­ing the auton­o­my to alter the rates would lim­it the states’ rev­enue-rais­ing options. States are resist­ing for­go­ing this tax­a­tion pow­er until the GST regime sta­bilis­es and its rev­enue impli­ca­tions become clear­er. To win the states’ con­sent, the cen­tral gov­ern­ment had to agree for a zero GST on petro­le­um prod­ucts in the ini­tial years of the new indi­rect tax sys­tem. Exist­ing Union and state tax­es on these items would con­tin­ue for a lim­it­ed peri­od while the rest of the econ­o­my embraces GST. States, on the oth­er hand, dropped their demand for exclud­ing petro­le­um prod­ucts from the purview of GST through an exemp­tion spec­i­fied in the Con­sti­tu­tion itself.

What is the ben­e­fit of such a compromise?

Keep­ing petro­le­um prod­ucts with­in the GST chain but at a zero rate ensures that when the GST rate for oth­er prod­ucts and ser­vices is admin­is­tered for petro prod­ucts, no con­sti­tu­tion­al amend­ment is required. It promis­es admin­is­tra­tive ease. How­ev­er, apply­ing zero GST on these items while sub­ject­ing them to the exist­ing cen­tral and state tax­es per­pet­u­ates the cas­cad­ing effect of split tax­a­tion. How­ev­er, such inclu­sion also reduces the uncer­tain­ty for com­pa­nies pro­duc­ing mul­ti­ple prod­ucts using petro­le­um and non-petro­le­um raw mate­r­i­al inputs.

Which are the indus­tries that will be affect­ed by the zero GST on petro­le­um products?

Besides crude, states do not want GST on four oth­er petro­le­um products—petrol, diesel, nat­ur­al gas and jet fuel. While crude oil is one of the raw mate­ri­als for a num­ber of down­stream indus­tries includ­ing petro­chem­i­cals, syn­thet­ic tex­tiles, plas­tic, poly­mers and glass, diesel and jet fuel are used in the trans­porta­tion and avi­a­tion sec­tors. Nat­ur­al gas is used in the pro­duc­tion of cook­ing gas and urea (a wide­ly used fer­tilis­er) and as a fuel in pow­er plants. If the cur­rent levies on these five items such as cen­tral excise, cus­toms duty, cen­tral sales tax (CST) and state-lev­el val­ue-added tax (VAT) are retained, pro­duc­ers of their down­stream prod­ucts as well as ser­vices and util­i­ties that use these fuels would not be able to claim cred­it for those tax­es to meet the GST lia­bil­i­ty on their final output.