GAIL Could See Higher Transmission, Expense Cut On Natural Gas GST Inclusion

The potential inclusion of natural gas under the Goods and Services Tax could translate into lower expenses and increased transmission and trading volumes for GAIL India Ltd.

Recent commentaries by India's Oil Minister Hardeep Singh Puri and the Petroleum Ministry Secretary Pankaj Jain suggest that the government is reviving discussions of including natural gas under the GST regime.

While the inclusion could benefit customers the most, it could also impact GAIL's various business segments, according to Jefferies.

Natural gas integration in GST could potentially decrease natural gas prices by $0.8 to $0.8 per million metric British thermal unit, the brokerage said.

In fiscal 2023, various states in India imposed value-added taxes totaling Rs 20,000 crore on natural gas. Should these taxes be subsumed by the GST framework, Jefferies predicts a reduction in natural gas expenses.

Consequently, natural gas would become more competitive, compared to naphtha and fuel oil.

Enhanced competitiveness is expected to accelerate the adoption of natural gas in India, which in turn, would bolster GAIL's transmission and trading volumes in the medium term.

While the tariff charges in GAIL's transmission business are already under GST, the value-added tax imposed on the 1.4 million metric standard cubic meters per day of gas, used as fuel by the company, is currently excluded from GST coverage. With the inclusion, the Rs 80 crore currently paid by the company for value-added taxes would become eligible for input credit. This input tax credit would reduce the company's overall expenses.

While the company's transmission business is likely to benefit from this arrangement, it's also probable that some of the tax advantages will be passed on to its consumers, according to Jefferies.

For the company's gas trading segment, VAT paid on gas purchases from third parties is already offset against VAT charged on gas sales. Hence, there will be no incremental benefit of the inclusion, Jefferies said.

Currently, no VAT is payable on LNG used as input, as it is treated as GAIL's own gas given it is the importing entity. Thus, the inclusion will have no standing of taxes, according to the brokerage.

GAIL presently bears a burden of Rs 300 crore in value-added tax on gas purchases, without the provision of input tax credit, Jeffries noted.

With the proposed inclusion, input tax credits would become accessible, potentially elevating the company's consolidated Ebitda by 2%. However, there's a caveat. If the government mandates the company to pass on the benefit to Indian oil marketing companies, this increase in Ebitda might not materialise, Jefferies pointed out.