Reportedly, the Ministry of Petroleum and Natural Gas (MoPNG) has taken on board a proposal mooted by the industry during recent pre-budget discussions to bring natural gas within the ambit of the Goods and Services Tax (GST) thereby ensuring a uniform tax on gas throughout the country.
Touted as a major step forward in realizing Union Government’s goal of increasing the share of natural gas in India’s energy mix from the current level of 6.2% to 15% by 2030 by reducing its cost for both industrial and domestic use, the MPNG has indicated that the proposal will be placed before the GST Council (The Council is the all powerful federal body mandated to decide on all GST matters viz. tax rates, inclusions, exclusions, exemptions etc; chaired by the Union finance minister, its other members are finance ministers of states and Union territories) – after stakeholders’ consultations.
Launched on July 1, 2017, GST is a single nation-wide tax that subsumes within it more than a dozen taxes of the pre-GST era, namely central excise duty (CED), service tax, sales tax/value added tax (VAT) besides a host of local taxes such as octroi, purchase tax, turnover tax, etc. That regime suffered from several anomalies such as multiplicity of taxes which varied widely across states (for instance, on natural gas CED is 14%, even as VAT varied from a low of 5% in Rajasthan to 14.5% in Andhra Pradesh and Karnataka, 15% in Gujarat to 21% in Uttar Pradesh); ‘cascading’ effect or ‘tax-on-tax’; large-scale evasion and high transaction costs.
GST being a ‘single tax’ applied all over India, provision of set-off for tax paid on inputs and in-built disincentive for an entity not keen on reporting its purchases/sales (or else, it won’t get input tax credit), the new regime paves the way for freeing the system from all of the above anomalies, giving a boost to low cost economy and enabling manifold increase in tax revenue.
However, the constitutional amendment Act on GST while providing for inclusion of crude oil, natural gas, petrol, diesel and aviation turbine fuel (ATF) under its ambit, had kept these products ‘zero rated’ for now. Put simply, these continue to be governed by the pre-GST dispensation. When will the ‘zero rated’ tag on these products go? The Act has given this power to the GST Council. In this regard, the then finance minister and chairman, GST Council, Arun Jaitely had alluded to taking up inclusion of natural gas in its 18th meeting i.e. just before launch of GST. During 2018 and 2019 also, this was put on Council’s agenda but was deferred. In this backdrop, the talk of including gas now (after consultations with stakeholders) is laughable.
Meanwhile, replying to a question on a TV channel (July 1, 2017), Jaitely had quipped ‘he was personally not in favor of excluding the aforementioned products’. Yet, the decision to keep them out was anomalous. There are other reasons as to why the promise being made now (in case of gas) does not instill confidence.
First, the above products account for about 16% of the states’ total tax revenue. The states had apprehended that including them under GST from the day one would result in substantial loss of revenue. Their concern was addressed under the GST Compensation Act, 2017 by providing for compensation to the States for five years (2017-18 to 2021-22) for the loss of revenue to be calculated as the difference between their actual collection and the amount they would have got assuming annual growth at 14% over the 2015-16 level under the pre-GST regime. The Union Government had also put in place funding arrangement to make it happen.
Thus, an amendment to the GST Compensation Act (2018) provided for levy of a cess on demerit goods (those which fall in the highest tax slab of 28 per cent) such as automobiles, tobacco, drinks and so on with a proviso to use the proceeds for compensating States. The cess was to remain in force for five years in sync with the Centre’s obligation to compensate States for that period. In this backdrop and having fully protected the interest of states, it made no sense to keep oil and gas products outside GST.
Second, exclusion of oil and gas products from GST purview is extremely damaging. While, on the one hand, oil and gas companies viz. Oil and Natural Gas Corporation (ONGC), Oil India Limited (OIL), Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL) etc. don’t get credit for the taxes paid on their purchase of inputs, consumables and equipment, on the other, their output faces multiple levies viz. CED, VAT and other local levies of the erstwhile dispensation and their cascading effect.
Natural gas is used for generation of power (nearly 25,000 mw capacity is based on use of gas) which is also excluded from the ambit of GST. Because of the exclusion, power companies don’t get any credit for taxes paid on inputs, consumables and equipment used in its generation and distribution. Furthermore, Entry 53 in the State List of the Seventh Schedule of the Constitution empowers the states to collect duty on sale of electricity (except when it is consumed by the Union government or Railways). Since, no offset is available for the electricity duty, this exacerbates the cost.
The high cost of oil and gas products as well as power – much of it resulting from their non-inclusion within GST – makes for a deadly cocktail leading to steep increase in cost to almost all industries and service establishments where these products are invariably used. It affects their competitiveness and stultifies growth. This also constrains the ability of the government to increase tax revenue. The Centre and states are fully aware of the implications of keeping these products out of GST. Yet, 42 months after launch of the new regime, no credible step has been taken to bring them under its ambit. That the Council will do it now in case of natural gas (which Jaitely wanted to do from the day one), it looks highly unlikely.
Third, an overarching reason as to why neither the Centre nor states have the gumption to include these products under GST has to do with their unwillingness to give up their major source of tax revenue which will go down drastically if these were to be taxed under the new regime (for instance, even if natural gas is placed in the highest 28% slab, the state will get to collect 14% – much lower than 21% currently levied by Uttar Pradesh). On the other hand, their revenue from other sources under GST has not shown the desired buoyancy.
Faced with persistent shortfall in their tax collection vis-à-vis requirements, the states have already petitioned the 15th Finance Commission to extend the scheme of compensation beyond March 31, 2022. This is under a scenario when they continue to collect tax on petroleum products as per the pre-GST regime. In such circumstances, it would be naïve to believe that they would let any of these products to be taxed a much lower rate which is inevitable if it is brought under GST.
Fourth, thanks to the lack of “vitality” and “resilience” in our tax machinery and deeply entrenched habit of businesses to game the system and avoid paying taxes, India is nowhere near realizing the potential of collections under GST (while, we should be aiming at Rs 150,000 crore per month consistently, the authorities feel blessed if in any given month, collections exceed Rs 100,000 crore). Until such time, the tax payer and the tax collector free themselves from this age-old syndrome and GST achieves the intended buoyancy, it is unlikely that the states will give up the ‘golden goose’.
To conclude, inclusion of all petroleum products (not just natural gas) under GST hold the key to transforming Indian economy and help our industries and businesses drastically cut their costs and compete in the international market. It is also crucial to achieving the desired buoyancy in tax revenue. It will also help in reducing subsidy on fertilizers wherein the Union Government controls the selling price at a low level to make these affordable to farmers. But, as things stand today, the chances of GST Council making any credible moves in this direction – even for natural gas – look remote.