FinMin suggests 5% GST levy on natural gas

The Union Finance Ministry is understood to have suggested that natural gas be brought into the ambit of the GST, in what is seen as the first step towards including petroleum products under the new indirect tax regime.

According to the proposal, which was mooted at the meeting of the GST Council on June 3, the Department of Revenue has suggested including natural gas within GST at a nominal rate of five per cent with immediate effect.

It has pointed out that this would benefit upstream exploration and production (E&P) companies and allow them to get credit of GST paid on inward supplies and ensure lower costs.

“This was a basic proposal. There is no decision at present and it is up to the GST Council,” said a source, adding that more discussions can take place at the next round of meetings on June 11.

At present, five petroleum products including crude petroleum, high-speed diesel, petrol, natural gas and aviation turbine fuel will not attract GST. The date of inclusion of these commodities will be decided by the GST Council at a later date. This was done to assuage concerns of loss of revenue by States and it has been expected that these products will be included in GST gradually.

But the Finance Ministry, in its proposal, has pointed out that alternative fuels to natural gas such as naptha and LPG are already included within GST. Non-inclusion of natural gas in GST will impact the cost of production of other items such as power, fertiliser, petrochemicals and even public transport in some cities.

The Finance Ministry has also promised that any revenue losses can be met by the existing compensation mechanism.

According to official estimates, the revenue from sales tax and value added tax from natural gas to States was about ₹5,674 crore in 2015-16, which is seen as being much lesser than the revenue to States from other petroleum products. Further, 81 per cent of this total revenue (from natural gas) — about ₹4,620 crore — accrues to three States: Gujarat, Maharashtra and Uttar Pradesh.

The inclusion of natural gas in GST has also been a key demand of upstream oil companies such as GAIL and was also pointed out by the Parliamentary Standing Committee on petroleum and natural gas in a recent report, as these firms will otherwise face a much higher tax burden.

“Exclusion of crude oil and natural gas from GST would have an inflationary impact on the prices of other downstream products produced from these feed stocks such as naphtha, kerosene, petrochemicals,” ICRA also noted in a recent report.

The issue was also raised by industry representatives at a workshop on GST that was held by the Ministry of Petroleum and Natural Gas last month. They pointed out that this exclusion will result in huge stranded taxes in the hands of oil industry due to non-availability of input tax credit towards non-GST products.