Page 124 - CW E-Magazine (8-7-2025)

Point of View

Broadening the base to include petroleum products
Eight years have passed but petrol, diesel, natural gas, and aviation turbine fuel (ATF) continue to be excluded from the GST
regime and remain subject to central excise duty and state VAT. Fortunately for the chemical industry, naphtha, a feedstock for making
aromatics, olefins and derived petrochemicals, comes under the purview of GST (at 18%).

While there is no constitutional block for including the major fuels mentioned, bringing them under the GST fold needs specific
recommendations by the GST Council, comprising finance ministers from States and the Centre. And therein lies the problem. While
the GST Council did take up the matter in a meeting in September 2021, a decision was deferred due the significant repercussions on
the State and Central exchequers. The matter has not been taken up since. Furthermore, in a meeting held in December 2024, States
even rejected a more limited proposal to include just ATF under GST.

What are the trade-offs?
The crux of the matter involves striking a delicate balance between revenue considerations of States and the economic benefits
of GST inclusion.

The primary concern among States is that subsuming petroleum products under GST would lead to a revenue shortfall even at
the highest GST rate of 28%, upsetting budgets and forcing curtailment of welfare programmes. In the five years to FY23, revenues
to States from Sales Tax/VAT on petroleum constituted 16-17% of total tax receipts. Then there is the freedom to raise or reduce
these taxes (which will not be the case if under GST). Today, there is wide variation in VAT rates on petroleum between States: while
Telangana imposes 35.2% on petrol and 27% on diesel, in Meghalaya it is 13.5% or Rs. 13.5 per litre (whichever is higher).

The benefits of bringing petroleum products into the ambit of GST will be substantial – both to individual and industrial consumers.
Even if the highest GST tax slab of 28% were imposed on fuel, it would potentially narrow down the tax range by 10-20% compared
to the current regime, leading to tax savings that would raise the disposable income of households. Several lobby groups speaking on
behalf of the chemical and allied sectors, have been advocating the move as it will provide fiscal relief by enabling businesses claim ITC.
What can be the way forward?
Finding a workaround the concerns is undoubtedly a challenging task, but not impossible. The very adoption of GST by the 28
States and 8 Union Territories stemmed from the Central government’s assurance of bearing the revenue loss incurred by States.
Today, barring a few States, the politics of the States and the Centres are more closely aligned than eight years ago, and this should
make things easier.

At the time of the last Union Budget oil marketing companies believed the Finance Minister would recommend the move, but
she stayed silent. A phased approach wherein as a first measure ATF and natural gas are brought into the ambit of GST has been
proposed. Though Gujarat, Maharashtra, and Andhra Pradesh, which were reticent, seem to have come around, there are holdouts
amongst other States still. Airlines, in particular, are peeved on the delay, as ATF is the single-largest operating cost they incur, and
they have to bear an onerous tax rate of ~25% on this single count with no option for set-off.
The move to include natural gas seems to have the support of the Ministry of Petroleum and Natural Gas, as it will, for one, make
manufacture of fertilisers cheaper. Natural gas (domestically produced or imported in the liquefied form) is the most efficient feedstock
(and energy source) for urea manufacturing and savings on this count will mean lesser subsidy payouts to manufacturing units to
keep selling prices for the nutrient below the cost of manufacture. Chemical manufacturing units that primarily use natural gas for
meeting energy needs will also benefit, as will many other manufacturing units – small, medium and large.

Transformative step
The introduction of GST has been a transformative step in India’s taxation system, simplifying the tax structure, promoting
transparency and enabling units to operate more efficiently. But there is increasing expectation for GST 2.0 to focus on critical areas
such as dispute resolution, audit simplification and GST rate rationalisation.
These reforms can help boost India’s economic development substantially – across manufacturing and services.
Ravi Raghavan

124 Chemical Weekly July 8, 2025

Contents Index to Advertisers Index to Products Advertised