The move is prompted by petromins attempt to incentivise investments in the capital-intensive sector through further tax breaks, and avoid the complications of keeping a part of the petroleum industry in GST and the rest out of it.
The ministry also pitched for tax concessions for green-fuel projects. To reduce the operational cost of airlines, the ministry wants aviation turbine fuel (ATF) to be classified a declared good by amending the Central Sales Tax Act, which would cap sales tax at 4%.
If the recommendations are accepted, companies seeking and producing oil and coal-bed methane will be eligible for duty-free import of more capital goods, tools and equipment, said a government official privy to the development.
The petroleum ministry also wants an import duty waiver for capital goods for new refineries and modernisation of existing units. Currently, the duty works out to 18.62%, including 5% basic customs duty, 8.24% countervailing duty, 3% education cess and 4% special additional duty.
It told the finance ministry that if petrol, diesel and ATF were excluded from GST, then finished products would be under the existing tax regime, while input goods & services would come under the more benign GST regime.
This would prevent companies from setting off the tax credit on the inputs against the tax liability on the final product, which would have a cascading effect, the ministry pointed out.
"There is a strong case for including petrol, diesel and ATF in GST. Excluding them would also adversely affect their rate of return because of companies' inability to nullify the negative impact of the taxes, and deter investments in the downstream sector," said Prashant Deshpande, an expert in GST and partner at Deloitte.
The petroleum ministry, therefore, has asked the finance ministry to either include auto and jet fuels in GST or make changes in Cenvat credit rules so that downstream companies get input tax credit against central GST incurred on inputs, consumables and capital goods, as well as various services consumed in refining, marketing and trading. State Vat laws should also be amended so that state GST on inputs is allowed to be set off against state Vat on jet and auto fuels, the ministry said in a pre-Budget note to North Block.
The petroleum ministry also pointed out to the finance ministry that companies were already losing around Rs 1,000 crore a year as they cannot utilise the credit on input services for exploration & production as outputs--crude oil and gas--are exempt from excise duty.