December GST meets to consider inclusion of natural gas – Economy News

The Union Finance Ministry has received a proposal from the Petroleum Ministry to bring natural gas under the ambit of the Goods and Services Tax (GST) and is likely to place it before the GST Council at its meeting in Jaisalmer in Rajasthan on December 21.

The VAT The Council also includes the state governments and usually makes decisions by consensus.

The Ministry of Petroleum is pushing for the inclusion of natural gas in the GST as it believes it will be beneficial for the petrochemical value chain. It is believed that the current structure of paying multiple taxes on gas, the magnitude of which varies from country to country, is of a tiered nature.

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Natural gas is, in addition to its use as a fuel, an important industrial raw material. It is used to produce urea, a common fertilizer, and is fed into capital-intensive crackers to produce olefins (ethylene/propylene), feedstocks for a wide range of industries.

In addition, the Ministry of Finance is also reviewing the windfall tax, which is currently levied on petroleum products. It will analyze the tax collections so far and the rough price trend before taking a final decision on whether to scrap the tax, the sources said.

Currently, central excise duty is levied on natural gas at the union level; and Value Added Tax (VAT) is levied at the state level. Gas producers, cracker units and user industries are practically subject to different tax rates, which complicates the tax process and denies many companies the full benefit of input tax.

Currently, VAT on natural gas ranges from 3% (Maharashtra) to as high as 15% (in Gujarat). In Andhra Pradesh the rate is 5%, Rajasthan 10% and Assam 14.5%. The union government imposes a central excise duty of 14% on compressed natural gas.

Prashant Vasisht, senior vice president – ​​corporate ratings, Icra said that by including natural gas under the GST, the producing companies will have to pay lower taxes, which will reduce operating costs. “If that benefit is passed on to consumers, they would benefit too. The inclusion would largely benefit upstream companies and sectors across the value chain,” he said.

While afta is currently subject to GST at a rate of 18%, petroleum products – dieselpetrol and ATF are not subject to GST. Many state governments are reluctant to agree to the proposal to do this auto fuels under the GST, as the VAT on these products is an important source of autonomous income for them. For its part, the Center taxes these products almost entirely through cess, the proceeds of which it does not have to share with the states.

Analysts say ONGC, Oil India and Reliance would be among the key beneficiaries if gas is included in the GST scope, along with city gas distribution companies. According to a report by Morgan Stanley, Indraprastha Gas, Gujarat Gas, GAILand Petronet LNG would benefit enormously from the proposed regime.

However, experts say that some states – such as Maharashtra, Andhra Pradesh, Gujarat, Rajasthan and Uttar Pradesh – which generate substantial revenue from VAT on natural gas, may not necessarily agree with the inclusion of gas in the GST.

But since most of them are ruled by the National Democratic Alliance (NDA), there is a possibility of the proposal being accepted in the council. According to Jefferies, total VAT collections from natural gas in FY23 across India were around Rs 23,000 crore.

Meanwhile, the issue of abolishing the windfall tax has been under consideration for more than a month. In October, Prime Minister’s adviser Tarun Kapoor had said there was “no relevance to the tax now” as the global situation crude oil prices have fallen significantly compared to 2022, when the tax was introduced.

To be fair, the windfall tax is the higher tax rate imposed by the government on certain specific products in a specific sector, when economic conditions allow these products to generate above-average profits.

In 2022, after the start of the conflict between Russia and Ukraine, the price of Brent crude oil spiked to around $135/barrel and remained above $100/barrel for several weeks. Recognizing this, the government decided to impose a windfall tax on domestic crude oil production and on the export of gasoline, diesel and jet fuel. This was aimed at curbing unprecedented profits of oil companies and generating additional revenue for the government.

Since its imposition, there have been more than 20 revisions to the cess based on the movement of crude prices and crack spreads of HSD, MS and ATF. The government had increased the windfall tax on crude oil from Rs 6,000 per tonne to Rs 7,000 per tonne with effect from July 16, 2024.

However, when crude oil prices began to fall in August, the windfall tax was reduced. By August 31, 2024, the tax on domestically produced crude oil had fallen to Rs 1,850 per tonne, and from September 18 onwards, it finally fell to zero per tonne. The windfall tax on diesel and ATF exports will be maintained at zero.