The Indian government has had discussions about bringing natural gas under the Goods and Services Tax regime, but it hasn't happened yet. Pankaj Jain, the Petroleum Secretary of India, stated in a recent media report that the government is "cautiously optimistic" about bringing natural gas under the GST regime and anticipates reaching a resolution on the topic in the financial year 2025.
Jain stated that domestic taxes on natural gas are still a work-in-progress, impacting the use of natural gas. To understand this we have to first understand how the current taxation impact natural gas.
Current Taxation Of Natural Gas
The Goods & Service Tax regime, which was introduced in 2017, excluded five petroleum products: crude oil, natural gas, petrol, diesel, and jet fuel. As a result, natural gas attracts legacy taxes such as central excise duty, state value-added tax, and central sales tax.
In simpler terms, the current tax structure for natural gas in India attracts a variety of input and output taxes, resulting in a plethora of taxes.
Depending on the rate charges, bringing natural gas under the GST regime could result in lower prices for customers.
Benefits of Bringing Natural Gas Under GST Regime:
Reduced Tax Inefficiencies
Like discussed previously, taxes are levied on natural gas at various stages in its supply chain, with each attractive separate tax levied on top of previous taxes, thereby inflating prices.
Bringing the fuel under the GST regime would allow for a streamlined tax structure that would reduce the overall tax burden and make natural gas more competitive.
Tax Benefits To Gas Companies
Under the current system, gas companies, city gas distribution networks, and industrial gas users cannot claim an "input tax credit".
An input tax credit, essentially, allows businesses to reduce the taxes they owe on their sales by the amount of tax they've already paid on their input costs.
Bringing natural gas under GST would allow these entities to claim input tax credits, potentially lowering their costs and improving operational efficiency.
Uniform Taxation Across States
One of the biggest inefficiencies of the value-added tax system is that the VAT rate varies significantly across states. This creates an uneven playing field for businesses as well as consumers.
GST would ensure a uniform tax rate across the country, regardless of whether gas is purchased or sold.
Currently, the VAT rate charges differ substantially, with Maharashtra charging a VAT rate of 3% while in Assam it is 14.5% on gas.
Potential CNG Price Reduction
Currently, compressed natural gas (CNG) is subject to a 14% central excise duty. This increases the final price for customers.
Furthermore, the centre also charges a 28% GST rate on CNG vehicles. And, depending on the type of CNG vehicle, the government also charges a compensation cess in the range of 1-22% in order to compensate states for any revenue loss they incur due to the shift from the previous value-added tax system to GST.
GAIL (India)'s Chairman, Sandeep Kumar Gupta, also stated that the GST rate for CNG-powered vehicles should be slashed to 5% from 28%, on a par with electric vehicles, back in April.
Boost To Natural Gas
In the end, a better and more streamlined tax structure, a reduction in the overall tax burden, a potential drop in prices to be competitive, and an easier input tax credit mechanism would incentivize businesses to switch to natural gas for their fuel usage.
This would help with the faster adoption of natural gas.
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