Introduction of GST for petroleum products; total tax incidence to remain same
Two auto fuels, petrol and diesel, are likely to witness a 28% GST plus states levying a local sales tax or VAT. The total tax incidence will be equal to the present tax incidence, which comprises of excise duty, levied by the central government and VAT charged by the states.
Why is this important
There is no pure GST on petrol and diesel anywhere in the world and India too will have a combination of GST and VAT. The timing of bringing petroleum products under the purview of GST is likely to be a political call which centre and states will have to take collectively.
- Currently, the central government levies an excise duty of Rs 19.48/litre on petrol and Rs 15.33/litre on diesel. The total tax incidence on petrol is ~45-50% and on diesel, it is ~35-40%.
- For petrol and diesel, the total incidence of present taxation is beyond the peak rate of 28% and if the tax rate was to be kept at 28%, it would result in a loss of revenue to both the centre and the states.
- Currently, the central government receives Rs 20,000 crore of input tax credit by keeping petrol, diesel, natural gas, jet fuel and crude oil out of the Goods and Services Tax (GST).
Stocks to be impacted
GST is an ad valorem tax (charged as a percentage on ex-factory price) and would have a cascading impact on retail prices whenever refinery gate prices are increased or decreased because of a change in international oil prices. While the central excise is a fixed levy and does not change with changes in prices, the state VAT charges are ad valorem and the states earn more if the oil prices go up.
GST implementation on petrol, diesel, natural gas, crude oil and ATF will help the industry in offsetting the GST they pay on the sale of these products against the GST paid on the input.
Indian Oil Corp (CMP: Rs. 164, Market Cap: Rs. 1,59,516 Crores, FY2020 EV/EBITDA: 6.2)
Hindustan Petroleum Corp Ltd. (CMP: Rs. 301, Market Cap: Rs. 46,042 Crores, FY2020 EV/EBITDA: 5.9)
Bharat Petroleum Corp Ltd. (CMP: Rs. 409, Market Cap: Rs. 88,754 Crores, FY2020 EV/EBITDA: 5.9)