The Union finance ministry has received a proposal from the petroleum ministry for inclusion of natural gas under the ambit of the Goods and Services Tax (GST), and will likely take it to the GST Council as it meets in Rajasthan’s Jaisalmer on December 21.
The GST Council includes the state governments too, and it typically takes decisions via consensus.
The petroleum ministry is pushing for the inclusion of natural gas in GST, as it feels it will be beneficial for the petrochemical value chain. The current structure of paying multiple taxes on gas, the incidence of which differs across the states, is seen to have a cascading nature.
Natural gas is a major industrial feedstock, besides its use as fuel. It is used to produce urea, a common fertiliser, and fed into capital-intensive crackers to produce olefins (ethylene/propylene), inputs for a wide range of industries.
Separately, the finance ministry is also reviewing the windfall tax, currently levied on petroleum products. It’s analyzing the tax collections so far, and the crude price trend, before taking a final call on whether to scrap the impost, the sources said.
At present, at the union level, central excise duty is levied on natural gas; and at state level, value added tax (VAT) is imposed. Gas producers, cracker units and the user industries are practically subject different rates of taxes, complicating the taxation process and denial of full benefit of input tax credit to many businesses.
Currently, the VAT on natural gas ranges from 3% (Maharashtra) to as high as 15% (in Gujarat). In Andhra Pradesh, the rate is 5%, Rajasthan 10%, and Assam, 14.5%. The union government imposes a central excise duty of 14% on compressed natural gas.
Prashant Vasisht, senior vice president–corporate ratings, Icra said that by inclusion of natural gas under GST, the companies producing will have to pay lower taxes, which will bring down the cost of operations. “If that benefit is passed on to the consumer, they would benefit too. The inclusion would largely benefit upstream companies as well as sectors throughout the value chain,” he said.
While aphtha is currently under the GST ambit at the rate of 18%, petroleum products – diesel, petrol and ATF- are outside the GST. Many state governments are reluctant to agree to the proposal of having auto fuels under the GST, given that VAT on these products are a major source of autonomous revenue for them. On its part, the Centre taxes these products almost entirely via cesses the proceeds of which it doesn’t have to share with the states.
Analysts say that ONGC, Oil India and Reliance would be among the major beneficiaries of gas being included in the GST ambit along with city gas distribution companies. According to a report by Morgan Stanley, Indraprastha Gas, Gujarat Gas, GAIL, and Petronet LNG would hugely benefit from the proposed regime.
However, experts say that some states—such as Maharashtra, Andhra Pradesh, Gujarat, Rajasthan & Uttar Pradesh–which earn substantial revenues from VAT on natural gas may not necessarily agree for the inclusion of gas in GST.
Still, since most of them are ruled by the National Democratic Alliance (NDA), there is a possibility the proposal may be accepted at the council. According to Jefferies, in FY23, the total VAT collections from natural gas was about Rs 23,000 crore across India.
“The inclusion of natural gas in GST may lead to short-term revenue adjustments for states and the Centre, but these impacts can be mitigated. At the same time, the cost benefits may lead to increased volumes and any loss of revenue may get compensated by that. A carefully designed GST rate can ensure minimal revenue disruption,” said Sandeep Sehgal, partner-tax, AKM Global.
Meanwhile, the issue of scrapping windfall tax has been under consideration for more than a month now. In October, Tarun Kapoor, adviser to the Prime Minister, had said that there is no “relevance of the tax now” as the global crude oil prices have declined substantially compared to 2022 when the tax was implemented.
To be sure, windfall tax is the higher tax rate levied by the government on certain specific products in a specific industry when economic conditions allow above-average profits to be generated by these products.
In 2022, post the start of the Russia-Ukraine conflict, Brent crude oil prices spiked to about $135/barrel and remained above $100/barrel for several weeks. Recognising this, the government decided to impose a windfall gains tax on domestic crude oil production as well as exports of petrol, diesel, and jet fuel. This was aimed at curbing unprecedented profits earned by oil companies and generating additional revenue for the government.
Since the imposition, there have been over 20 revisions in the cess, basis the movement in crude prices and crack spreads of HSD, MS and ATF. The government had raised the windfall tax on petroleum crude to Rs 7,000 per metric tonne from Rs 6,000 per tonne, effective July 16, 2024.
However, in August as crude prices started falling, it consequently slashed the windfall tax. By August 31, 2024, the cess on domestically produced crude oil was down to Rs 1,850 per tonne, which eventually dropped to zero per tonne, from September 18. Windfall tax on export of diesel and ATF is retained at nil.
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