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Gas may come under India’s unified tax regime ahead of gasoline, diesel
India’s aim to bring crude, transport fuels and gas under a unified tax regime has so far met with stiff resistance from state governments, but gas could come under the tax umbrella earlier than other oil products — although the move towards that target won’t be free of hurdles.
Even nearly four years after the goods and services tax or GST came into effect, crude oil, natural gas, gasoline, gasoil and jet fuel are still outside its purview as state governments argue that the central tax would hit their revenues, especially after the COVID-19 lockdown hit their revenues.
But the recent pledge from Indian Prime Minister Narendra Modi to bring gas under the GST has spurred a rally in the share prices of gas companies in a country where gas accounts for only 6% of the country’s energy mix, compared with a world average of around 25%.
“Bringing gas under GST would be a stepping stone in bringing the overall petroleum sector under the ambit of the GST. But now because of COVID-19, everyone — both center and the states — is short of revenue and petroleum is a good source of revenue, it will take some time to build a consensus,” said Dharmakirti Joshi, chief economist at CRISIL, a unit of S&P Global.
GST is a unified indirect tax that aims to replace various taxes levied by the federal and provincial governments, such as the value added tax, or VAT.
Senior officials argued that states need to look at natural gas a bit differently from the rest of the petroleum products as the clean fuel volumes are relatively smaller compared with gasoline and diesel, so the revenue loss would be relatively less.
“Looks like gas may come under the GST before transport fuels and crude,” said a senior official at a multinational energy firm in India.
Varying levels of taxes
VAT rates on natural gas in India can differ from 5% to 24.5% in different states and are subject to rebates for certain industries in each state. In Gujarat, where the majority of the LNG terminals are located, gas incurs a 15% VAT, whereas Andhra Pradesh, the state from which ONGC and Reliance-BP will supply their KG-Basin gas production, has a VAT rate of 24.5%.
The government of Andhra Pradesh increased the rate of tax on natural gas to 24.5% from 14.5% in September 2020 to boost its revenue after the pandemic lockdown dried up its coffers.
A Reliance-BP domestic gas tender to supply gas produced from the KG-D6 basin at JKM minus 18 cents/MMBtu on an ex-Gadimoga basis would incur the higher VAT rate applicable in Andhra Pradesh at 24.5%. Based on the JKM price of $6.275/MMBtu on Feb. 23, the VAT incurred would be around $1.50/MMBtu.
Whereas, if the GST rate was set at 5% for natural gas, the tax incurred would drop down to around 31 cents/MMBtu. However, companies that have procured gas through the tender for supplying to another end-user for consumption outside Andhra Pradesh can provide a C-form and pay a 2% central sales tax, or CST. VAT would be charged at the point of sale depending on the natural gas tax rate in each state.
“Gas under the purview of GST would be a big plus for Indian gas demand as it would bring down the cost for end-buyers. Suppliers would also be able to apply for input tax credit and the complex VAT and CST regime would get simplified,” and Indian RLNG buyer said.Sumit Pokharna, vice president of Kotak Securities, said that with gas being outside the GST, gas-based industries like fertilizers, power, refinery and petrochemicals do not get the benefit of tax credit of VAT paid on purchases of gas, resulting in a higher cost of production for industrial consumers.
Secondly, in the latest federal budget the government has highlighted its plans to monetize pipeline assets of public sector undertakings like GAIL. “If gas comes under GST, demand for natural gas will improve substantially, resulting in better valuations for pipeline assets,” he added.
Tough task at hand
“VAT is levied by the state governments; inclusion of gas in GST might impact revenues of state governments. Hence, resistance is coming from state governments,” Pokharna said.
But oil and gas companies — both state-run and private — have highlighted that the move to keep gas and the four energy commodities out of the GST list had affected investments in infrastructure, as their input costs have risen.While a downstream player pays GST on the procurement of a plant, machinery and services for the production of petroleum products, it has not been able to claim input tax credit against the excise duty and VAT paid on petrol, diesel and aviation turbine fuel, as these products are outside the ambit of the GST. Currently, only LPG, naphtha, fuel oil and kerosene are under the GST.
“The central government will find it hard to convince the states for the inclusion of gas in the GST, but with Narendra Modi speaking about gas coming under the ambit of the GST, it has given more confidence to buyers,” an Indian end-user said.
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