OCTOBER 03, 2016

By Suresh Nair

WHATEVER is destined not to happen will not happen, try as you may. Whatever is destined to happen will happen, do what you may to prevent it. This is certain. - Ramana Maharshi

Taking a cue from the above, one could start by saying that GST in India is destined and is definitely on the fast lane. And yes, it is catching up for all the delays it has encountered till date!!! As example, the two day inaugural session of the GST Council which concluded on 23rd September has seen consensus on key aspects on the levy of GST in India, with both Centre and States deciding the threshold issue and the cross-empowerment model for tax administration, without resorting to voting by the members.

Based on the sound bytes from the Government and heightened action thereof, GST is expected to be rolled out in India with effect from 1 April 2017 and there is a definite sense of expectation by the Trade and Industry.

Needless to say, GST will be a transformational reform for the Indian economy, paving the way for a common Indian market and reducing the cascading effect of tax on the cost of goods and services. It will impact amongst others the Tax Structure, Tax Incidence, Tax Computation, Tax Payment, Compliance, Credit Utilization etc. leading to a complete overhaul of the current indirect tax system.

As of now, 5 petroleum products viz. Petroleum crude, Motor Spirit, Air turbine fuel, High Speed Diesel and Natural Gas are included in GST, but will be governed under existing Central Excise Act as well as State VAT and Central Sales Tax Act, till GST Council recommends the same for coverage under GST.

The Chief Economic Advisor Mr Arvind Subramanian has recommended inclusion of the said petroleum products within the GST base and it is important for both Centre and States to examine the impact of continuing to levy VAT on sale of natural gas till such time the GST Council would decide otherwise.

While there is merit in bringing in all the said 5 products under GST, from day one of GST, this article seeks to focus only on inclusion of Natural Gas.

Natural gas, being the lowest polluting fuel, is widely used for domestic as well as Industrial inputs by the large, medium and small industries in 15 states, mainly in Gujarat, Rajasthan, Assam, Andhra Pradesh, Haryana & Maharashtra. Theiron & steel, cement, glass, ceramics, chemical, fertilizer, auto ancillary industries etc. would generally consume natural gas for its manufacturing related activities.

Based on study of information/data available from the website of Ministry of Petroleum and Natural Gas (for the year 2013-14), private final consumption of natural gas (City gas distribution for CNG and PNG purpose) is approx. 12.8%, confirming thereby that the balance 87.2% is used for intermediate/ industrial purposes.

It is estimated that States earn VAT revenue of approx INR 6000 crores on sale of natural gas in respective states. Assuming the above proportion of industrial users, the corresponding VAT revenue would be INR 5230 croresapprox which is available as credit to the buyer/manufacturer subject to retention of input credit in case of inter-state supplies of the manufactured goods

Under the proposed GST Regime, the finished manufactured products will be subject to levy of GST but the Natural Gas used as industrial inputs will be subject to VAT, for which no input tax credit will be available. This is against the basic objective of GST which is to ensure that input taxes are not blocked in the system, i.e., tax cascading is eliminated.

This will lead to a situation where the VAT paid on procurement of natural gas would not be available as credit which will lead to increase in cost of production, rendering medium and small industries economically unviable and uncompetitive as end users could potentially explore importing the desired products at a better and competitive value as compared to domestically sourced goods which would be loaded with the increased cost. This could also seriously impact the ‘Make In India' mission.

Whether or not the industries consuming Natural Gas would get relief from the respective state governments and if so quantum thereof is too farfetched to estimate and expect at this juncture. It is, therefore, of paramount importance for the Centre, States and all stakeholders to reconsider covering Natural gas in GST from the beginning to avoid cascading effect and ensure that the industries presently operating on natural gas do not get a raw deal under GST.

(The author is Partner Indirect Taxes-Infrastructure, Industrial & Consumer, Ernst & Young LLP and the views expressed are strictly personal.)