Prior to the launch of most revolutionary reform post-independence viz. Goods and Services Tax [GST] on July 1, 2017, finance minister, Arun Jaitely had alluded to 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 idea was to do it in the 18th meeting just before the launch but it appears to have been deferred.
Keeping in mind Jaitely’s assurance that Council is open to making changes to accommodate genuine concerns, hopefully, this should happen sooner than later. It is important to understand as to why it must happen without slightest of delay. But, first, a few words on why key oil & gas products viz. crude, gas, petrol and diesel were excluded in the very first place.
These items along with potable alcohol and real estate which have also been kept out of GST ambit, account for about 1/3rd of the states’ total revenue. They had an apprehension that including them upfront might result in substantial loss of revenue.
This was without basis as the aspect of revenue loss had already been addressed via giving them full compensation for 5 years [a provision was made in the constitution amendment act itself]. 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]. Yet, to insist on excluding oil & gas from GST was untenable.
Meanwhile, the government had decided to include these products but keep them ‘zero rated’ [again via constitutional amendment] granting the Council powers to fix the rate as and when it deemed appropriate. However, this makes no material difference to the situation on the ground. One is aghast to look at the consequences.
The above 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.
On the other hand, consumers will continue to suffer from the cascading effects of the extant tax structure. They will also be differentially affected as VAT varies from state to state. In case of gas, it is 5% in Rajasthan, 14.5% in Andhra Pradesh and Karnataka, 15% in Gujarat and 21% in Uttar Pradesh [UP]. Being outside GST, states can also continue with other local taxes. For instance, Gujarat also levies purchase tax on that portion of inputs/consumables used for manufacture of urea that is sold outside the state.
Electricity generation and distribution is also excluded from ambit of GST. As a result, those engaged in this business won’t get any credit for taxes paid on inputs used by them. Thus, the excise duty or state VAT paid on gas as also tax paid on gas equipment and stores get embedded in the cost of the end product [read electricity].
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 too is non-creditable under GST dispensation. 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 included under GST thereby making them taxable under this regime, their producers will be able to take full credit for the taxes paid on inputs resulting in substantial reduction in their cost. Considering that these are basic inputs used in almost every sector of the economy, the impact on inflation and enhancing the cost competitiveness across all segments will be huge.
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. In turn, this will help in furtherance of the goal of fiscal consolidation, galloping subsidy being a major factor responsible for slippages in the past.
In this backdrop, the indication given by the finance minister to include natural gas under GST is good omen. But, why limit this very logical and sensible move only to gas? Why should the other products also not be included?
Here again, it would appear that the union government is going more by convenience instead of sheer logic. The revenue from sales tax and VAT from natural gas to States is small [about ₹5,700 crore in 2015-16] when compared to revenue from other products. So, by keeping latter out while letting former in, it won’t be displeasing the states even as bulk of their revenue would still be intact.
Replying to a question on a TV channel [July 1, 2017], Jaitely quipped ‘he was personally not in favor of excluding mentioned products [not even potable alcohol and real estate]’. True, he was acting in deference to the wishes of states and feels proud to take decisions by consensus in the Council. But, doing so by compromising on basic tenets of GST is not a healthy sign.
Hopefully, he will undo the wrong [promptly] by including crude, gas, petrol, diesel, potable alcohol and real estate under GST to realize its full potential.