The Hindu Business Line : Taxing aviation fuel

The concept of ‘declared goods’ has lost its relevance at this age when goods and services move freely not just across the country but across nations as well.

It is no surprise that the Committee of State Finance Ministers has said that it is not in favour of the Centre declaring aviation turbine fuel as a commodity of ‘national importance’, a decision that would instantly reduce the rate of value added tax across every State to a flat 4 per cent. Obviously States that now tax it at up to 30 per cent are loathe to lose a substantial chunk of revenue. It is another matter that the Committee may not have the jurisdicti on to speak up on behalf of all States on this subject because it was tasked only with the responsibility of laying down the framework for the economy to move to a unified goods and services tax. There is nothing in its mandate that suggests that it involves the determination of, not just aviation turbine fuel, but of any commodity or service as important whether from a perspective of national economy or general public welfare. If it were so, it would have to go into the entire basket of goods and services produced in the economy and classify them as such — a task that was certainly not part of its brief.

Indeed, the concept of declaring goods as of national importance — hence the acronym ‘declared goods’ —might have been valid at a time when the Indian economy post-independence was in a nascent stage and expertise at the State level in matters of public finance and taxation policy was perhaps still evolving. It is clearly an anachronism at this time and age when goods and services move freely, not just within the country but across nations as well. Only goods/services that are so vital to the daily needs of the common public merit a modest levy in any consumption-based tax regime. If food grains are the best example of these, alcohol or tobacco perhaps best exemplify a category that would attract a high, deterrent rate. However, between these two extremes a modern economy typically engages in the production of a vast number of other goods which are best treated at a standard rate that is neither so high as to be regarded as regressive nor so low as applicable to ‘merit’ goods. The situation is rendered complex by the fact that the same good may be at once be an article of final consumption as well as an input in the creation of some other product of final consumption. Aviation turbine fuel is one such warranting perhaps a nuanced approach to its taxation.

The solution lies in the Centre vacating the field of commodity taxation altogether in favour of the States. The revenue buoyancy inherent in such restructuring provides the basic framework for moderate rates of commodity taxation in the economy. That would, in conjunction with natural instinct of States to compete with one another in attracting investments, would help usher in a regime of moderation in tax policy. The aviation industry, whose situation is no doubt dire, may be better off campaigning for such fundamental restructuring than goading the Centre into engaging in legal quick fixes for easing its pain.

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