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Post GST Taxation of Motor Spirit

APRIL 17, 2017

By Rakesh Kumar, IRS, Retd.

1. THE GST is likely to be rolled out w.e.f. 01.07.2017. Though the term "Goods & Services Tax", as defined in Article 366(12A) of the Constitution covers "any tax on supply of goods, or services or both, except taxes on the supply of alcoholic liquor for human consumption" and,thus, it covers all petroleum products also, to begin with, five petroleum products namely – "Petroleum crude, High Speed Diesel, Motor Spirit (commonly known as Petrol), Natural gas and Aviation Turbine fuel" would be outside the scope of GST. For this purpose, Entry 84 of List I and entry 54 of the List II of the Seventh Schedule of the Constitution still covers the abovementioned five petroleum products. Thus on these five petroleum products, while the central govt. would continue to levy central excise duty, the state govt. would continue to levy sales tax. Tobacco and Tobacco products while being covered under GST, would also be subject to central excise duty but no sales tax would be charged and therefore, tobacco and tobacco products are also covered by Entry 84 of List I.

2. The Central government has introduced the Taxation Laws Amendment Bill, 2017 which, among other amendments, amends the Central Excise Act, 1944 for confining levy of excise duty only to the five petroleum products mentioned above and tobacco& tobacco products.

2.1. Section 6 of the Taxation Laws Amendment Bill replaces the existing Sec 3(1) of the Central Excise Act with a new Sec 3(1), providing for levy of duty of excise on all excisable goods (excluding goods produced or manufactured in SEZs) which are produced or manufactured in India, as mentioned in the Fourth Schedule of the Act and, at the rates mentioned therein.

2.2. The Fourth Schedule to the amended Central Excise Act, 1944 contains –

(a) General rules for interpretation of this schedule, which are reproduction of the "General Rules for Interpretation of the First Schedule to the Central Excise Tariff Act, 1985";

(b) Chapter 24 covering tobacco and tobacco products,which is reproduction of the Chapter 24 of the First Schedule to the Central Excise Tariff Act 1985; and

(c) Chapter 27 titled "mineral products"which contains only the headings 2709, 2710 and 2711 and their subheadings with the relevant chapter notes,sub-heading notes and supplementary notes

2.2.1. The headings and their sub-headings of chapter 27 of the Fourth Schedule are identical to the corresponding headings and sub-headings of the First schedule to the Central Excise Tariff Act, 1985 except that in the first subheading 2710 12 covering 'Light oils and preparations', instead of the words "Motor Spirit", the words –"Motor Spirit (commonly known as petrol)" have been used and accordingly, the four subheadings -2710 12 11, 2710 12 12, 2710 12 13 and 2710 12 19 covering three types of special boiling point spirits with different boiling point ranges and other Motor Spirits have been put under the subheading –"Motor Spirit (commonly known as petrol)".The relevant sub-headings of the heading 2710 of the Fourth Schedule are reproduced below.

"271012 -- Light oils and preparations.

---Motor Spirit(commonly known as petrol)

27101211 ---- Special boiling point spirits (other than benzene and toluene) with nominal boiling point range 55-115 degrees centigrade.

27101212---- Special boiling point spirits(other than benzene,benzol, toluene and toluol) with nominal boiling point range 63-70 degrees centigrade.

27101213 ---- Other Special boiling point spirits (other than benzene,benzol, toluene and toluol)

27101219 ---- Other

27101220 --- Natural Gasoline Liquid

27101290 --- Other"

2.2.2. Rate of duty of 14% ad valorem plus Rs 15 per litre has been prescribed not only for the four subheadings of 'Motor Spirit(commonly known as petrol)' but also for the 'Natural Gasoline Liquid' of subheading 27101220 and ' other Light oils and preparations' of subheading 27101290.

3. To understand the implication of this, it would be necessary to have a look as to how the "Motor spirit (commonly known as petrol)" is taxed under the present provisions of the Central Excise Act, 1944 read with the first Schedule to the Central Excise Tariff Act,1985. The heading 2710 of the First Schedule to the Central Excise Tariff Act, 1985, divides the petroleum products, other than waste oil into– "light oils and preparations" (subheading 2710 12 and "others" (subheading 2710 19).The term 'Light oils and preparations' is defined in subheading note 4 as the petroleum oils whose 90% or more by volume distil at 210 degrees centigrade. The subheading 2710 12 has three further sub-headings –'motorspirit' (2710 1210), 'natural gasoline liquid (2710 1220)' and 'other light oils and preparations' (27101190).The 'motor spirit' is further divided into four sub-headings – 2710 1211, 2710 1212 and 2710 1213 covering special boiling point spirits (other than Benzene, Benzol, Toluene &Toulol) with different boiling point ranges and sub-heading 2710 1219 covering 'other motor spirits'. The chapter notes or subheading notes or supplementary notes do not define 'Petrol' but define only the 'motor spirit' as "any hydrocarbon oil excluding crude oil, whose flash point is below 25 degree centigrade and which either by itself or in admixture with any other substance is suitable for use as fuel in spark ignition engines". The Special Boiling Point Spirits (SBPS) of sub heading 2710 1211, 2710 1212 and 2710 1213 are defined in the supplementary notes as light oils, as defined in sub-heading note 4, not containing any anti-knock preparations and with a difference of not more than 60 degree centigrade between the temperatures at which 5% and 90% by volume distils. Thus, neither the sub-headings of 2710 12 nor the chapter notes, sub-heading notes or supplementary notes of chapter 27 either define the term "petrol" or mention the same. In contrast, there is clear definition of 'superior kerosene oil', 'aviation turbine fuel', 'high speed diesel', 'light diesel oil' and 'fuel oil' as hydrocarbon oils conforming to the Indian Standards specifications of the Bureau of Indian Standards specified for them. It is only the exemption notification – Notification No. 12/2012-CEdt. 17.03.12 as amended from time to time and its predecessor notifications which distinguish between "motor spirit commonly known as petrol" and other motor spirits and prescribe separate rate of duty for them. Besides this, section 111 of Finance Act 1998 levies an additional excise duty and Sec. 147 of the Finance Act, 2002 levies special additional excise duty on "Motor Spirit commonly known as petrol". The 'motor spirit commonly known as petrol' is a variety of motor spirit which conforms to IS specification IS 2796:2000.The petrol has larger boiling point range and contains anti-knock preparations and other additives and,therefore, is different from other Motor Spirits. Therefore, to put all motor spirits including special boiling point spirits, light Naphtha etc. under the heading' motor spirits(commonly known as petrol)' is totally wrong, more so, when the definition of SBPS of the headings 27101211, 27101212 and 27101213 given in the supplementary notes to chapter 27 of the Fourth Schedule also defines them as light oils, not containing any anti knock preparations. However, this is what has been done in heading 2710 12 of chapter 27 of the Fourth Schedule to the Taxation Laws Amendment Bill, 2017.

4. Moreover when Entry 84 of the List I of the Seventh schedule of the Constitution covers only one variety of Motor Spirit i.e. "motor spirit commonly known as petrol" and petrol is different from other varieties of Motor Spirit,it is absolutely wrong to put all motor spirits covered by sub-headings 2710 1211 to 2710 1219 under the label of 'motor spirits commonly known as petrol'. Besides this, rate of duty of 14% advplus Rs 15/ per litre is also prescribed for Natural Gasoline Liquid of subheading 27101220 and other Light oils and preparations of subheading 27101290, which are not even Motor Spirit. The Taxation Laws Amendment Bill, 2017 cannot go beyond the provisions of the Constitution and put certain goods like SBPS, Naphtha, NGL etc., within the purview of central excise, while no central excise duty can be levied on the petroleum products other than those mentioned in the entry 84 of the List I of the Constitution.

5. The implication of treating SBPS, Naphtha etc. as petrol would be that these products would not only get taxed at the rate of duty applicable for petrol but would also attract Additional excise duty under Sec. 111 of the Finance Act, 1998as amended by Sec. 157 of the Finance Act, 2003 and Sec. 119 of the Finance Act, 2005 and Special Additional excise duty under Sec 147 of the Finance Act, 2002, both of which are leviable on the "Motor spirit commonly known as petrol. As is clear from Sec 15(1) of the Taxation Laws Amendment Bill, 2017 read with its Third Schedule, Sec 111 of the Finance Act, 1998 and Sec 157 of the Finance Act, 2002 have not been repealed. What is worse, since there is no provision in the Central Excise Act, 1944 or the Cenvat Credit Rules made thereunder for utilization of central excise duty credit for payment of CGST on the final product,a number of industries using SBPS and Naphtha as input for use in the manufacture of final products covered by GST would not be able to utilize the credit of the Central Excise duty paid on these inputs for payment of CGST on their final products. Similarly, since there is no provision in the CGST Bill or in the draft Input Tax Credit Rules for utilization of CGST Credit for payment of central excise duty on the final products and since the oil refineries use a large number of capital goods, inputs and input services which would suffer CGST, they would not be able to utilize the CGST credit not only for payment of excise duty on petrol, HSD, and ATF, which, in any case, are outside the GST, but also on Naphtha and SBPS, which are also major final products for refineries.

6. It is hoped that this serious mistake in the Taxation Laws Amendment Bill, 2017 is rectified. A simple solution would be to confine chapter 27 of the Fourth Schedule to the amended Central Excise Act, 1944 only to the five petroleum products, namely- 'petroleum crude', 'high speed diesel', 'motor spirit(commonly known as petrol)', 'natural gas' and 'aviation turbine fuel', which are, at present, excluded from the purview of GST and give a clear definition of 'Motor Spirit Commonly Known As Petrol' also based on its IS Specification IS 2796:2000.

(The author is former Member (Technical), CESTAT and the views expressed are strictly personal.)

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