Once again, there are reports alluding to the possibility of the GST Council – all powerful body mandated to decide on tax rates, inclusions/exclusions, exemptions etc – taking up for consideration inclusion of natural gas within the ambit of GST. The prefix ‘once again’ has a loaded connotation.
Even prior to launch of the Goods and Services Tax [GST] on July 1, 2017, finance minister, Arun Jaitely had given a hint that this would be considered in the 18th meeting of the Council to be held just before the launch. But, that was not to be. Six months since then, we are still hearing about its likely consideration! The issue needs to be seen in a much larger perspective.
Natural gas is one of the 5 hydrocarbon products – other 4 being crude oil, petrol, diesel and aviation turbine fuel – which were excluded from the purview of GST at the very stage of passing the constitution amendment bill that paved the way for replacing the existing convoluted tax structure [that includes highly cumbersome 17 central and state level duties] by GST.
However, Jaitely may not agree to the use of word ‘exclusion’. As informed by him in response to an intervention by P Chidambaram [finance minister under UPA] during discussion in the parliament, the version of constitution amendment bill mooted by the then government [2010] had excluded these products. On the other hand, Modi – led government has included them but with a caveat that these are ‘zero’ rated for now. Meanwhile, the GST Council has been empowered to fix the rate as and when it deems appropriate.
Jaitely may have some solace in arguing that the current provision is an improvement over what was contemplated by the erstwhile UPA regime. Yet, for the present, the position on the ground is as bad as ‘exclusion’. This is further reinforced by the fact that fixing rates for products other than natural gas are not even on the agenda of the Council and most unlikely to be taken up in the near future.
The extant arrangement implies that even as oil and gas companies continue to charge excise duty and VAT – plus other local levies under existing dispensation – they won’t get credit for duty paid on purchase of their inputs including equipment, machinery etc as under GST regime, their output [read crude, gas, petrol and diesel] are de facto not under it [being zero rated]. This goes against the very philosophy of GST requiring seamless tax and input credit chain.
The uncovered input tax credit would result in a staggering loss [estimated to be about Rs 25,000 crores] to Oil and Natural Gas Corporation [ONGC], Oil India Limited [OIL], Indian Oil Corporation [IOCL], Bharat Petroleum Corporation [BPCL] and Hindustan Petroleum Corporation [HPCL] etc. These undertakings being the lifeline of the economy, the government cannot simply afford their getting hemorrhaged.
Electricity generation and distribution is also excluded from ambit of GST. Further, under the Constitution, Entry 53 in the State List of the Seventh Schedule empowers the states to impose tax on sale and consumption of electricity, except when consumed by GOI or the Railways. This levy is non-creditable under GST. Together with above embedded cost, this will result in substantial tax cascading when electricity is used as an intermediate input.
If, oil and gas products as also electricity are taxed under GST only, their producers/generators will be able to take full credit for the taxes paid on inputs resulting in substantial reduction in their cost. This in turn, will enhance the cost competitiveness across all segments of the economy and lower inflation. For industries such as fertilizers wherein the government controls the maximum retail price [MRP] at a low level to make these affordable to farmers and reimburses excess of production cost over this as subsidy to the manufacturers, this will prevent increase in subsidy and thus help in furtherance of the goal of fiscal consolidation.
Despite these manifold benefits, why should the Council be so slow in fully integrating oil and gas products under GST? The sole reason is none other than obsession of states with revenue considerations. These items along with potable alcohol and real estate [these too have also been kept out of GST ambit], account for about 1/3rd of the states’ total revenue. They fear that under GST, they will be put to huge loss.
This is without basis as the aspect of revenue loss had already been addressed via giving them full compensation for 5 years. The Council had gone a step further in arranging required resources for this by levying cess on demerit goods – those attracting 28% tax under a 4 slab structure [5%, 12%, 18%, 28%]. Such an utterly conservative approach can only stem from lack of faith in the capability of GST to deliver in terms of buoyancy to tax revenue.
Unfortunately, this is being pushed to a point whereby, the powers that be have plans to let states and union government retain power to levy VAT and excise duty [ED] respectively even after all oil and gas products get fully assimilated under GST. If, it happens, this will not only militate against the basics of the new dispensation, but will also seriously undermine its efficacy.
Hopefully, better sense will prevail and the Council will refrain from pursuing such abhorrent ideas. Instead, it will remain focused on bringing all 5 products [not jut natural gas] within GST with rates fixed at 18% at the outer limit.
As regards revenue concerns [finance ministry expects a shortfall of about Rs 50,000 crores during the current year mostly on account of less than estimated collection under GST], these can only be mitigated by plugging loopholes and bringing within the tax net millions of assesses who have thus far escaped.