There is no parity in VAT rates applicable to different fuel products. Petroleum products in India are considered as sensitive and accordingly, there is co-existence of high taxes and subsidies.  Thus, the multiplicity of taxes, differences in tax base, variations in calculation of tax and frequent changes in taxes create unnecessary complexities for the petroleum industry.

The Goods and Service Tax (GST) regime offers an opportunity to integrate the petroleum sector with the tax regime of other sectors of the economy. Though meetings of the Empowered Committee (EC) of State Finance Ministers with the Union finance minister have achieved consensus on some issues related to implementation of GST, strong differences still exist on inclusion of petroleum under GST. It appears that the Centre is in favour of keeping petroleum sector within GSTs ambit as opposed to the states, who are firmly against any such move, lest they lose control over the significant revenue contributed by this sector.

A significant drawback of the current indirect tax regime is the large scale cascading of tax. Tax cascading essentially occurs when there is a denial of credit of input/input services used for rendering a supply. This blockage of input taxes creates tax cascading, leading to economic distortions and non-neutralities in the application of tax.

In case of exploration and production sector, service tax incurred on input services cannot be utilised as there is no output liability on crude oil and natural gas. The non-deductible service tax gets embedded in the cost of crude oil and natural gas supply, which in turn gets embedded in the cost of other petroleum products, resulting in tax cascading.

The petroleum sector includes oil exploration and production, refining, transportation and pipelines, and distribution and marketing. At all these stages, substantial inputs of goods and services are acquired on which GST would be paid. Hence, coverage of petroleum sector under GST is bound to address the basic problem of tax cascading in petroleum sector.

GST was initially proposed to be introduced April 2011 onwards. However, since consensus has not been achieved between the Centre and states, the implementation from April 2011 seems implausible. What is required is a solution, which would not only help the Centre to meet its objectives but also not pose as a major setback to the states.

As recommended by the 13th Finance Commission, a probable solution is the inclusion of all petroleum products under GST and a supplementary excise duty with restricted credit on emission fuels. This would not only benefit the Centre and the states but also free the sector from a complex and inefficient tax structure and integrate this sector with the other sectors of the economy.