How will the new tax rates worked out by the GST Council last week impact the petroleum sector? The oil and gas industry will be left with stranded taxes, higher blockage of working capital and dual compliance under the GST regime effective July 1, tax experts say. “Upstream and downstream companies will be left with stranded taxes leading to higher blockage of working capital, on which they will suffer opportunity loss,” K Ravichandran, Senior Vice President at rating agency ICRA said.
India will roll out GST that includes most goods and services but excludes crude oil, natural gas, petrol, diesel and jet fuel. Other oil products such as kerosene, liquefied petroleum gas and naphtha are included in the GST. This means oil companies will have to comply with both the old and the new tax regimes. But the tax credit can’t be transferred between the two systems. Input tax credit allows an oil producer at time of paying the tax on the final output to deduct the tax already paid on inputs (purchase of machinery, crude oil etc). As most of the core petroleum products have not been included in the GST ambit, the tax credit which could have been availed cannot be availed under the new tax regime effective from July 1.
“Procurement of goods and services for the upstream and downstream sector will be under GST whereas the majority output will be outside the ambit of GST. This would mean that the majority of GST paid on goods and services by these companies would be a cost to them. This would substantially increase their costing,” said Abhishek Jain, Partner, Indirect Taxes at E&Y. Ravichandran also said the biggest issue will be complying with both GST and existing tax framework as five products are kept outside GST. This will lead to higher compliance-related efforts by companies.
The oil ministry had recently submitted its concerns to a Parliamentary panel on the issue including additional stranding of taxes on inter-state purchase of goods, non-availability of credit on local purchase of goods, additional burden due to levy of GST on stock transfer and dual compliance. “The GST Law would not apply on five petroleum products including Crude Oil, Natural Gas, High Speed Diesel, Motor Sprit, and ATF. Consequently, the main products of the E&P Sector, Crude Oil & Natural Gas, shall continue to be leviable to existing levies. However, purchase of goods and services required for exploration and production of Crude Oil and Natural Gas, would attract GST. Hence, it would have adverse implication on E&P Sector,” The ministry submitted to the Parliamentary Standing Committee on Petroleum and Natural gas.
State-run ONGC produces Value Added Products such as LPG, Kerosene, Naphtha, ATF and HSD in addition to crude oil and gas. Crude Oil, Natural Gas, HSD and ATF would continue to attract taxes under existing law — Excise Duty, VAT/CST, OID Cess, NCCD, and Royalty — whereas LPG, SKO and Naphtha would be under GST. This would create a complex situation for dual compliance of GST as well as existing laws in addition to increase in compliance cost.
The GST council has finalized a four-tier GST rate structure of 5 percent,12 percent, 18 percent and 28 percent with lower rates for essential items and highest for luxury and de-merit goods, many of which would also attract an additional cess. The centre last Thursday released the list of goods which would fall under each tax rate category. According to the document, Kerosene, Liquefied Propane, Liquefied Butane and Liquefied Petroleum Gases (LPG) for supply to consumers will be taxed under the 5 percent bracket. Also, coal gas, water gas, producer gas and similar gases, other than petroleum gases and other gaseous hydrocarbons will also be taxed under the lower tax bracket.
“Currently excise duty is nil on PDS Kerosene and LPG-domestic as they are subsidised products. VAT varies from nil to 5% in different States. Hence there will be marginal increase in consumer prices in certain States,” Ravichandran said. Prashant Modi, Chief Executive Officer and Managing Director of Great Eastern Energy Corporation, India’s first coal bed methane producer, hailed the tax structure given under GST and called for inclusion of natural gas under the GST regime. “This is a very positive move for the energy sector. Also, natural gas being a clean and environment-friendly hydrocarbon should be brought under the GST at 5% at the earliest in order to enhance domestic production and consumption. This will also help in achieving reduction in the import of LNG.” Modi said.
Under the new system, products that will be taxed under the higher rate of 18 percent include petroleum oil and oil obtained from bituminous minerals, Superior kerosene Oil, Fuel oil, Base oil, textile oil, lubricating oil, waste oil, petroleum gas and other gaseous hydrocarbons such as propane, butane, ethylene, propylene, butylene and butadiene. Greg Lloyd Authentic JerseyShare This