It will, of course, cause a revenue shortfall for states, but that can be dealt with by hiking the rate of GST compensation cess
The ministry of petroleum and natural gas (MoPNG) has taken on board a proposal—mooted by the industry during recent pre-budget discussions—to bring natural gas within the ambit of the Goods and Services Tax (GST). This will ensure a uniform tax on gas throughout the country and lower its price for both industrial and domestic use, which may help increase its share in India’s energy mix from the 6.2% to 15% by 2030. The proposal will be placed before the GST Council after stakeholders’ consultations.
Under the pre-GST regime, industries and businesses faced multiplicity of taxes which varied widely across states. For instance, on natural gas while the central excise duty (CED) levied by the central government is 14%, the value added tax (VAT) varies from a low of 5% in Rajasthan to 14.5% in Andhra Pradesh and Karnataka, 15% in Gujarat to 21% in Uttar Pradesh. In addition, states also levied local taxes such as octroi, purchase tax, turnover tax, etc. That system was also afflicted by the so-called cascading effect or tax-on-tax.
GST is a ‘single tax’ applied all over India with a set-off provision for tax paid on inputs, it paves the way for freeing the system from the above anomalies. However, the constitutional amendment Act on GST while providing for inclusion of crude oil, natural gas, petrol, diesel and aviation turbine fuel (ATF) under its ambit, had kept these products ‘zero-rated’. Put simply, these continue to be governed by the pre-GST dispensation. When will the ‘zero-rated’ tag go? The Act has given the power to the GST Council to decide.
In this regard, the then finance minister and chairman, GST Council, Arun Jaitely had alluded to taking up the inclusion of natural gas in its 18th meeting, ie, just before the launch of GST (July 1, 2017). During 2018 and 2019 also, this was put on the Council’s agenda but was deferred. In this backdrop, the talk of including gas now (albeit after consultations with stakeholders) is ludicrous.
Furthermore, replying to a question on a TV channel (July 1, 2017), Jaitely had said ‘he was personally not in favour of excluding the aforementioned products’. Yet, the Centre and the states decided to exclude them, and the position continues till date. A close look at how things have panned out brings out several inconsistencies in their approach to this most crucial issue.
First, the GST Compensation Act, 2017 provided for compensation to the states for five years (2017-18 to 2021-22) for the loss of revenue to be calculated as the difference between their actual collection and the amount they would have got assuming annual growth at 14% over the 2015-16 level under the pre-GST regime. Further, vide an amendment to the GST Compensation Act, 2018 (it provided for levy of a cess on goods falling in the 28% tax slab such as automobiles, tobacco, drinks etc), the government ensured that the required funds are garnered to compensate the states for the loss.
In view of above, and having made arrangements—backed by constitutional guarantee—to fully compensate the states for any shortfall in revenue, it was illogical to keep oil and gas products outside GST in the first place. It may be argued that states face a shortfall even while keeping them out and by bringing them in, the shortfall would have been even higher. So what? This does not in any way dilute a compelling case for their inclusion from day one. All that the Council needed to do was levy cess at a higher rate to meet the higher shortfall.
Second, the exclusion of oil and gas products from GST purview is extremely damaging. While, on the one hand, oil and gas companies, viz Oil and Natural Gas Corporation (ONGC), Oil India Limited (OIL), Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL), etc, don’t get credit for the taxes paid on their purchase of inputs, consumables and equipment, on the other, their output faces multiple levies, viz CED, VAT and other local levies of the erstwhile dispensation and their cascading effect.
The above makes for a deadly cocktail leading to a steep increase in cost to all industries and businesses where these products are used. It affects their competitiveness and stultifies growth in turn, constraining the government’s ability to increase tax revenue. The Centre and the states are fully aware of these implications; yet, 42 months after GST was launched, there are no credible steps to bring them under GST ambit. In case of natural gas, the Council intended to do it from the day one, but, to date, it has remained in deliberation mode.
Third, the transition from pre-GST dispensation to GST will drastically reduce the tax rate, and consequently revenue to the states. Thus, even if natural gas is placed in the highest 28% slab, the state will get to collect 14% (placement in 18%/12% slab, which is more realistic and will result in even lower collection 9%/6%) against 21% currently levied by Uttar Pradesh. The states shudder at the very thought of such steep reduction and that too when their revenues under the GST regime have not shown the desired buoyancy.
Faced with a persistent shortfall in their tax collection, the states have already petitioned the 15th Finance Commission to extend the subsisting scheme of compensation under GST beyond the current expiry date of March 31, 2022. In these circumstances, it is unlikely that they would let any of these products be taxed at a much lower rate—an inevitability if they are brought under GST.
Fourth, thanks to the entrenched habit of businesses to dodge the taxman (they are doing it even under GST despite the in-built mechanisms against evasion), India is nowhere near realising the potential of collections under the new regime (while we should be aiming at Rs 150,000 crore per month consistently, the department feels blessed if, in any month, collections exceed Rs 100,000 crore). So, it is unlikely that the states will be willing to give up the ‘golden goose’.
To conclude, the inclusion of all petroleum products (not just natural gas) under GST holds the key to transforming how businesses are run, cutting costs and competing in the global market. It is also crucial in achieving the desired buoyancy in tax revenue. It will help reduce subsidy on fertilisers and food where the selling price is controlled at a low level—much below the cost of supply—to make these affordable to farmers/consumers.
But, the million-dollar question is: Will the GST Council bite the bullet, and if so, when?
The author is Delhi-based policy analyst