Keeping petroleum products such as petrol, diesel, natural gas out of the ambit of the Goods and Service Tax (GST) is expected to result in higher cost of production for upstream companies such as oil and gas exploration firms as well as for downstream refining companies. For the end-consumer, this exclusion from GST, however, is unlikely to result in any significant increase in prices, industry sources said.
While the output of upstream and downstream companies have been kept out of the GST, the inputs that go into their making is subject to levy of GST. For instance, an oil or gas refiner that imports inputs such as gases, platforms, parts of platform, cranes, chemicals etc will have to pay 5 per cent tax under the GST regime. For work contracts for say building pipelines the tax rate is 18 per cent.
Imported inputs for purposes of oil and gas refining which are tax-free in the current regime have been brought under the GST net resulting in higher cost of production. But even though the cost of production increases, these can’t be totally passed on to customers such as domestic refineries or exports since the prices of these products are linked to international benchmarks. Any increase in prices due to higher taxes locally will encourage buyers to scout for international contracts offering similar products at cheaper prices.”The GST will lead to increase in costs for oil and gas explorers by around Rs 7,500-8,000 crore annually. The taxation structure needs to be relooked into to ensure that the exploration projects are in sync with our vision of Make in India,” said Anoop Kalavath, senior director at Deloitte.Similarly for refineries, nearly 70
Similarly for refineries, nearly 70 per cent of their refined products are petrol, diesel, natural gas, aviation turbine fuel (ATF), which are out of the GST net. Currently, the refineries take input tax credit on almost 80 per cent of the taxes paid. But going forward, the refineries cannot take credit for inputs that go in for production of petrol, diesel and ATF.
“After GST is rolled out, for every 100 rupee spend by refineries on taxes, we will not get any credit for nearly Rs 70 since 70 per cent of our products are outside GST. A company like GAIL, for instance, will not get any credit on taxes paid for building pipelines,” an executive with a state-owned refinery said. GST is expected to push up annual refineries cost by around Rs 12,000 crore, industry sources said. “Directionally, we should try to get petroleum products into GST as early as possible,” Kalavath said.
One of the reasons petroleum products such as crude oil, natural gas are not part of the GST is the reluctance on part of the states and the Centre to share this steady stream of revenues from the sector, which is a cash cow for them. It is expected that over the years these products will become part of the new indirect tax regime.
Centre and states earned a total of Rs 4.61 lakh crore in 2016-17 from various levied on petroleum products – comprising of the Central government’s earnings of Rs 2.73 lakh crore and states’ revenue of Rs 1.88 lakh crore, as per data from the Petroleum Planning & Analysis Cell. The Centre levies excise, custom duty and cess on crude oil, whereas the states’ earnings through petroleum sector are mainly through levy of sales tax and value added tax.
Similarly, since ATF is outside the GST, airlines will not be able to take input tax credit the fuel – a key input which comprises over 40 per cent of their operating expenses. In Budget 2016-17, the government has raised excise duty on ATF to 14 per cent from 8 per cent, though ATF for supply to aircraft under the proposed Regional Connectivity Scheme was kept at 8 per cent.
Ticketing systems under the GST regime also need to be realigned as every journey across states or countries will be treated as a separate journey and GST will be levied at the point of embarkation. This is in variance with the present tax arrangement where a return journey is treated as one journey irrespective of stopovers. Also, if the point of embarkation for a return journey is outside India, then it does not attract service tax.