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Published on: Nov. 9, 2020, 8:14 a.m.
Battle brews between Centre and state over natural gas
  • Natural gas: the next big item to be included in GST

By Rakesh Joshi. Executive Editor, Business India

Petrol, diesel, jet fuel, crude oil and natural gas fall outside the ambit of the Goods & Services Tax (GST). Experts have been arguing of late that bringing natural gas under the GST would lead to a reduction in the cascading impact of taxes on industries, such as power and steel, which use natural gas as an input. Global energy majors are also bullish on the growth of natural gas usage in India and have called on the government to bring it under the GST regime.

The inclusion of natural gas under the GST regime would do away with the Central excise duty and different value-added taxes (VAT) imposed by states. This would lead to an increase in the adoption of natural gas in line with the government’s stated goal to increase the share of natural gas in the country’s energy basket from 6.3 per cent to 15 per cent.

The ministry of petroleum & natural gas has backed the demand, reacting after global energy industry major BP plc called for it. “GST was a welcome federal initiative to ease trade and it will be good if natural gas is included in that,” said Bernard Looney, CEO, BP plc, at a recent India Energy Forum. He noted that, under the current regime, India was a complex market, as it has 29 markets within itself (because of differences in state laws).

The demand is being raised at a time when things are looking up on the prospects of domestic natural gas production. Three large discoveries will soon come into production. The first is in KG basin, which is going to start production soon. Then, Rajasthan is going to see a huge ramp-up in two months. Again, in KG basin, the government expects further production from ONGC in the next two years. Reliance Industries is working on three sets of discoveries, including R-Cluster, Satellite Cluster and MJ fields in KG basin. 

Revenue situation

“Bringing natural gas under GST is a decision that has to be taken by the GST council,” says Tarun Kapoor, secretary, ministry of petroleum & natural gas. “There is a request from the industry and the ministry of petroleum & natural gas supports that request. The reason for this is that gas can be transported seamlessly across states and we will manage to develop one market for it.” 

Yet, the transition may not be that simple. Currently, gas consumption is taxed at the Central, as also several state governments level, in addition to the gas transport tariffs. Since this arrangement yields a veritable cache of revenue for various quarters from Central excise and VAT, both the Centre and the states may not be amenable to forsaking the revenue, even if it is for the greater national good. The cash-strapped states recently put up a stiff fight at the GST Council over payment of GST compensation dues, forcing the Centre to yield ground. Also, the revenue situation for both the states and the Centre has got alarmingly tight post-Covid19.

A decision to bring natural gas under GST has been pending since 2018. In fact, top revenue department officials were then hoping that once the Centre and states would be assured of revenue flows, natural gas would be the next big item to be included in GST. A 5 per cent GST, equivalent to that being charged on coal, would benefit states in reducing price of CNG as well as bringing cooking gas piped into kitchens. 

Ahead of the last Union budget, the Oil Ministry made a renewed pitch for inclusion of natural gas in the ambit of GST to promote the use of the environment-friendly fuel by reducing multiplicity of taxes and improving business climate. “Currently, natural gas is taxed under the VAT regime, with VAT ranging from 3 per cent to 20 per cent across states,” the ministry said, in a booklet it brought out to promote the use of the fuel in automobiles, household kitchens, and industries. If brought under GST, the ministry said, natural gas will attract a uniform rate of tax at the consumption point anywhere in the country after doing away with current rates of excise duty and VAT. 

This, it said, would “result in an increase in state domestic product and socio-economic development owing to increased economic activities”, which will lead to improved employment opportunities. Also, it would lead to improved investor confidence and attract more investment in natural gas infrastructure in the country.

Unfortunately, the government’s failure to bite the bullet then ensured that the matter kept on dragging till Covid-19 struck at the heart of the economy and crippled most revenues.

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