With the passage of Constitutional Amendment Bill for GST, the biggest indirect tax reform since independence will soon be a reality.
Amid celebrations by the government, industry and stakeholders, petroleum sector is worried about the GST impact.
The Bill proposes to exclude five petroleum products viz. crude oil, natural gas, petrol, diesel and aviation turbine fuel, from the ambit of GST initially, to be included later, on the recommendations of the GST Council, whereas, other petroleum products (kerosene, naphtha, LPG) come within the ambit of GST.
Through this partial coverage and partial exclusion, GST add to the complexities of the sector.
Reversal of credits
Today, crude and natural gas are not subject to excise duty. Consequently, companies engaged in extracting and selling crude and natural gas are not eligible to avail credit of excise duty and service tax related to extraction and selling of crude and natural gas. Thus, such tax is a cost to these companies. In a GST scenario, the goods and services used for extraction and selling would come under GST, whereas crude and natural gas would be outside GST. Thus, credit of GST paid on goods and services would not be available.
Further, since petrol, diesel and ATF are subject to excise duty, refineries are able to avail credit of the excise duty and service tax paid on the goods and services used in the refinery and can offset the same against the output.
Exclusion of these products results in a peculiarity wherein the input (except crude) for the sector is subject to GST, whereas the majority output is outside the purview of GST. This would result in reversal of the majority credits that otherwise would have been available and would further distort the credit mechanism.
Today, when the industry is cheering and looking forward to reduction from the applicability of multiple tax laws, petroleum sector is perplexed with GST being an addition to the existing indirect tax regime.
In addition to the current indirect tax legislations viz. excise duty, VAT/CST, oil industry development cess etc., petroleum sector would be required to adhere to GST legislations in each state where the operations are carried out.
The companies which have operations across India would be required to comply with IGST, CGST and SGST legislations in all the states. Each jurisdiction would be required to maintain three GST ledgers for procurement credits and three for tax output, representing separate GST legislations.
Moreover, there would be other compliances such as registrations, filing of returns, tax payments, and assessments.
Cascading effect and impact on economy
Exclusion of these petroleum products could possibly result in increase in prices of these products due to the reasons mentioned above. Additionally, the taxes paid on these excluded products would not be creditable for the sectors covered under the GST. Thus, the taxes paid on these goods would be a cost for the sectors included in GST.
The concept was to introduce an integrated regime where taxes paid are creditable at each end of the supply chain.
However, considering the magnitude of contribution the petroleum sector has towards the GDP and the economy, there can truly never be an integrated GST without the inclusion of these products. The true reduction in tax costs and prices could only be achieved if the excluded products are bought within the ambit of GST at the earliest.
(With contribution from Yash Agarwal, senior tax professional, EY)
The author is tax partner (oil & gas practice), EY. Views are personal