Why Alcohol and Petroleum Products Remain Exempt from GST in India

The Bharatiya Janata Party (BJP)

The Bharatiya Janata Party (BJP), in power at the national level, aims to govern the country and influence all Indian states either directly or through coalition partners like the ones in Tamil Nadu. This goal is underpinned by a Uniform Governance Code, which seeks to standardize policies and regulations across the nation. One key aspect of this strategy involves the taxation framework, such as the Goods and Services Tax (GST) system, where certain provisions are designed to benefit state governments and align with their fiscal priorities.

The GST and its Exceptions

The current Goods and Services Tax (GST) system in India does not include alcohol for human consumption and five petroleum products under its ambit. These exceptions are rooted in specific constitutional provisions and the complex interplay of federal and state taxation powers. According to Article 366(12A) of the Constitution, as amended by the 101st Constitutional Amendment, GST is levied on the supply of goods and services, with the exclusion of alcoholic liquor for human consumption, and the temporary exclusion of specific petroleum products. This decision is made in consultation with the GST Council, a body comprised of finance ministers from both the central and state governments.

Taxation and Revenue Implications

The exclusion of alcohol and certain petroleum products from the GST regime is primarily due to the tax rates imposed by state governments. For instance, the state excise duties and all other taxes levied on alcohol contribute significantly to state revenues. The taxes on petroleum products, including petrol and diesel, are subject to a diverse spectrum of taxation, including state-level VAT or Sales Tax. In states like Tamil Nadu and Maharashtra, where high VAT or Sales Tax rates are levied, the resulting prices for petroleum products are significantly higher than in other regions. This is contrary to the national GST rate, which caps at 28 percent, making the inclusion of these products in the GST regime unprofitable for the government.

The Policy Decision

The central government faces a revenue-neutral challenge when considering the inclusion of these products under GST. At the highest rate of 28 percent, the central and state governments stand to lose substantial revenue. Currently, the maximum rate of GST on fuel is only half of the existing tax rates, and neither the central nor the state governments are willing to bear the revenue hit. The primary beneficiaries of this exclusion are state oil companies and local excise duties, which contribute substantially to state-level fiscal health.

Broader Context and Accountability

The decision to keep petroleum and alcohol out of the GST regime is not solely the responsibility of the BJP or any other political party. Every government, whether BJP, Congress, or a coalition, seeks to protect the interests of their respective state-level economies. All state governments have a vested interest in maintaining their existing taxation structures, especially those that impact fuel and alcohol prices. While the focus often remains on the central government and the BJP, it is a shared responsibility and reflects the complex governance realities in India.

In conclusion, the continued exemption of alcohol and certain petroleum products from the GST regime in India is a strategic decision aimed at maintaining the fiscal balance between the central and state governments. This decision reflects the broader political and economic dynamics at play in the Indian federal structure.