The inclusion of natural gas under the Goods and Services Tax regime could benefit both city gas distribution companies and customers due to potential tax reductions.
A few weeks back, Petroleum And Natural Gas Secretary Pankaj Jain had suggested some kind of resolution for the inclusion of natural gas in GST, in the current financial year. A decision on the inclusion will be taken by the GST Council.
The inclusion could benefits end consumers as prices could reduce after the inclusion.
How City Gas Distributors Could Benefit
Any cost benefits from bringing gas under GST would have to be passed on to the consumers, so margins of distribution companies will not rise, said Mahanagar Gas Ltd.'s management at an analyst meet on Friday.
The company expects city gas distributors to benefit from the inclusion if the GST slab rate is fixed at 12%. The benefits would be lower if the rate is fixed at 18%.
At a 12% GST rate, Kotak Securities Ltd. expects a 7–9% reduction in compressed natural gas prices. While the price reduction is positive in the short term, the benefits would offset due to higher gas costs.
This rise in costs will come from the rising shortfall of administered price mechanism for gas allocation, which has prices capped at a fixed price, thus benefiting gas companies, Kotak said.
Input Tax Credit
The inclusion will mitigate overall indirect tax charges and industrial or commercial customers would be able to get a GST input tax credit on gas, which is currently not available on the State Value Added Tax paid.
An input tax credit is a mechanism under GST, which allows businesses to claim credit for the GST they've paid on purchases.
Benefits For Industrial And Commercial Users
Current taxation on industrial and commercial users is not high, Kotak said.
Taxation is about 11% for users in Gujarat, 13% in Mumbai and 16% in Delhi, according to the brokerage's estimates. It is 22% in Uttar Pradesh due to higher local VAT.
There could only be a marginal benefit for users who do not claim input benefit, with the GST inclusion, Kotak said. However, for industrial users that would claim input tax credits, the GST inclusion will be positive, and encourage users to switch from liquid fuels to gas.
Benefit To Consumers
Due to availability of the input tax credit, end price of compressed natural gas for consumers will reduce. This would also increase competitiveness, as against alternative liquid fuels such as furnace oil or naphtha—where GST, and input tax credits are available.
Kotak's View
While the inclusion is a positive for the sector, the benefits remain moderate, according to Kotak.
There could be overall reduction in value added tax rates, it said. For Mahanagar Gas, in particular, the brokerage noted that since April 2022, the local VAT rates have reduced to 3% from 13.5% earlier. Therefore, the bulk of tax reduction benefit is behind.
The government will not like a large revenue impact since few states, like Gujarat, would need to be compensated, the brokerage said. It expects GST rate on gas to be 12% or 18%. The government may not apply the 5% or the highest 28% slabs, since the entire intent of the move is to promote gas usage in the country, it said.
CNG Price Reductions
At 18% GST rate, Kotak sees a 2-4% CNG price reduction in Delhi and Mumbai. At 12% GST rate, the price reduction will be higher 7-9%.
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