Bad idea to include petroleum in GST, says former chief economic advisor Arvind Subramanian

Subramanian highlighted that cess should be included in the regular rate structure

The inclusion of petroleum in the Goods and Services Tax (GST) regime would be a bad idea, as it is not politically advisable to ask states to give up more sovereignty, said Arvind Subramanian, former chief economic advisor of India, at an event organised by Centre for Social and Economic Progress on July 4.

“There is not going to be GST rate rationalisation; we are going backwards,” he added.

Subramanian highlighted that cess should be included in the regular rate structure.

“The default option is to absorb cess in the regular rate structure so that it is available for redistribution,” he pointed out.

Cess, at present, yields around 0.5 percent of the GDP.

GST was a remarkable feat of cooperative federalism, Subramanian noted, highlighting that while the Centre paid the revenue cost, states gave up their fiscal autonomy.

“Centre has lost 0.5-1 percent of GDP in revenues annually for the previous seven years, owing to 14 percent compensation paid,” Subramanian said.

States during this period have gained 0.2-0.6 percent.

“Poorer states have gained a lot from GST; states with lower growth have benefitted more,” said Subramanian.

GST has made tax rates more progressive relative to the past owing to IGST, the former CEA pointed out.

The compensation guarantee was also instrumental in shielding state finances during Covid, he said, pointing to another benefit of the GST regime, which can be a learning for the future.

“As we get more integrated, shocks will become more common. We need a counter-cyclical guarantee to shield them as they cannot borrow.”

Subramanian also stressed the need for more data, especially on refunds.

“Had we known in early years the true performance, rate-cutting spree might have been avoided,” he highlighted.

According to calculations by Subramanian, revenues have only returned to pre-GST revenue ratios in FY24, seven years after the implementation.

GST was implemented on July 1, 2017.