GST: Taxing fuels would require Centre to sort out input-tax credit system

By: | Published: November 25, 2016 6:18 AM

With all the non-petro procurements of refining and marketing companies coming in loaded with GST, the set-off of such taxes would not be entirely available since most of the output would be outside GST

Goods and Services TaxGoods and Services Tax

GST policy on various sectors of the economy is being intensely debated by the government and industry at large. In this debate, fate of a critical sectors of the economy, namely the oil and gas, still hangs in the balance, as final policy level decisions are yet to be taken. While the government and the GST council are empowered to introduce GST on specified petroleum products (viz petroleum crude, petrol, diesel, aviation turbine fuel and natural gas) from a recommended date, answers to key questions around when would GST kick-in, what would be the tax framework and what is expected of the industry participants in the interim, remain elusive.

The oil and gas sector, though one of core industries, has always been beset with regulatory and financial hurdles. The central government has tried to lend necessary support for its stability by providing tax exemptions, subsidies and other monetary and non-monetary assistance, especially to the upstream sector. The level of assistance provided to this sector can be gauged from the fact that nearly one-fourth of the total revenue foregone from custom duties is on account of the crude and mineral oils. However, it is likely that some of the good work on this front may be undone if the GST is activated for specified petroleum products at a later date rather than making it effective upfront. In case GST on these products is deferred, the stakeholders are staring at a possibility of a regime where, while GST applies on certain petroleum based products such as lubricants, naptha and kerosene, other specified products will continue to attract VAT and excise. This would render the sector worse-off from what it is under the current tax regime, which is highly undesirable.

The proposition of bringing identified petroleum products under GST at a later date brings in hosts of issues and difficulties for the companies operating in this sector. The industry would be required to operate under dual regimes; existing as well as the GST regime. To enable this, companies are expected to gear up their IT systems to match with the compliance requirements under both the regimes. Preparing the already complex IT system of oil and gas players to deal with both the regimes is a herculean task. Additionally, the companies would be required to undertake audits and assessments under both the regimes and deal with multiple tax authorities. With no clarity on the proposed date when the petroleum products would be rolled under the GST laws, the compliance struggles that are expected during the interim seem unending.

With all the non-petro procurements of refining and marketing companies coming in loaded with GST, the set-off of such taxes would not be entirely available since most of the output would be outside GST. The disallowance of tax credits will impact the cost of sales to the downstream sector, thereby exerting an upward pressure on the fuel price to consumers. The increased price of fuel will have an inflationary effect on various sectors ranging from road and air transport, railways etc. Alternatively, oil marketing companies are expecting huge increase in under-recoveries in case the increased cost due to non-creditable taxes is not passed on due to the parity-based pricing mechanism adopted in India.

Considering the possible negative impact that is likely to crop up in case the oil and gas sector is left out of GST, the industry at large is asking the government to consider the option of including the identified products under the GST net. For this, various options have been suggested by the industry bodies, such as treating the supply of identified petroleum products as ‘zero rated’ under the GST regime in order to enable refund of input credits. Other taxation models include simultaneous levy of GST and existing taxes on the specified products with a possible full-scale GST coupled with scaling down of existing taxes or visa-versa, thereby enabling companies to set off input taxes against output GST liability. Additional suggestions flowing in from the industry in relation to petroleum products include replacing the import parity pricing mechanism with other suitable methods, bringing in appropriate provisions under the GST law on credit restrictions on use of petroleum products to safeguard interest of the revenue etc.

Though the government is all decked-up to introduce the new regime in the coming months, true benefits from the new regime can be reaped by adopting the most appropriate taxation methodology, especially for the core sectors. As the dice on the GST implementation starts to roll, all eyes are keenly monitoring the discussions of the GST council to get the most awaited answer on inclusion of specified petroleum products under GST.

(With inputs from Saurabh Kanchan, director, Indirect Tax)

The author is leader, Indirect Tax, BMR & Associates LLP.

Views are personal

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition