Finance Minister Arun Jaitley has written to State Chief Ministers urging them to reduce the incidence of Value Added Tax (VAT) on petroleum products used as inputs in making of goods after the introduction of Goods and Services Tax (GST).
He has also requested States to explore the possibility of having a lower rate of VAT on petroleum products used for manufacturing of those items on which there is GST, so that there is minimum disruption in the pricing of goods.
The move comes after concerns were raised by the manufacturing sector on the higher tax incidence that they are facing as they do not get input tax credit on petroleum products.
At present, five petroleum products including crude petroleum, high speed diesel, petrol, natural gas and aviation turbine fuel do not attract GST as States were concerned over revenue losses. However, many of these products like natural gas are used as inputs for making fertilisers and petrochemicals. These fuels are also used for public transport.
“In the pre-GST regime, because the petroleum products and the final goods produced both attracted VAT, input tax credit of petroleum products was allowed to varying extent by different States,” said the Finance Ministry in a statement on Friday.
Now, manufactured goods attract GST while the inputs of petroleum products used in the manufacturing attract VAT and, it leads to cascading of taxes.
The Finance Ministry said that in the pre-GST regime, some States levied five per cent VAT on Compressed Natural Gas used for manufacturing of goods while others had a lower VAT rate on diesel used in the manufacturing sector.
Alternative fuels to natural gas such as naphtha and LPG are already included within GST and the Finance Ministry had also proposed including natural gas under the new levy.