Reduction is fine, but not permanent

At long last the Centre has reduced excise on petrol and diesel, the fuels on which the nation moves. If all the states now also reduce VAT in tandem, it would be a reasonable cut. If there has been one persistent irritant in the past few years, it has been the relentless rise in prices of petrol and diesel. At least two economic research agencies put out their calculations in the public domain earlier this year saying that the government was extracting revenue from petrol and diesel far in excess than the amount which would have enabled it to meet the Union budgetary projections this financial year. They also estimated that even if the government went for cuts of Rs 8-8.50 a litre it would not compromise revenue collections as projected in the budget. The reduction in excise and VAT by several states is welcome. If all the states go for a sacrifice of VAT, the relief to the common people would be more widespread. Some reports have estimated a 30 basis point easing of retail inflation due to this cut alone.

However, there is a catch. If crude prices keep rising globally, the gains from the reduction will be lost in a few weeks, or a few months, if one assumes that the prices rise will not rise in the run-up to the impending state assembly elections. The only permanent solution to the runaway prices of petrol and diesel is to bring the fuels under GST. There has been numerous debates around this vast country on the need to bring the two fuels under the umbrella tax structure, but no government has put it forward in writing to the GST Council that can take the issue forward. It has been estimated if it is done, the price of both commodities would come down to Rs 70-80 a litre that would immediately have a significant cooling effect on prices across the board.

With the economy getting back on the rails and buoyancy in both direct and indirect taxes becoming consistent the government should stop paying lip service to the issue and prepare to bring them under GST. Some of the extraordinary expenditure on relief measures undertaken on account of the pandemic is set to end quickly. The people of the country do not need to languish under the stress on the wallet due to revenue extraction from petrol and diesel indefinitely.