A case for including petroleum in the GST ambit
Petroleum should be part of GST
Vikram S Mehta / The Financial Express…newspaper.
The author is chairman of the Shell Group of Companies in India, and chairman, CII Committee on Hydrocarbons
The benefits of the GST to the petroleum sector and others that use these products would be considerably diluted if petroleum products are exempted from the GST. The finance minister is contemplating such an exemption because of the objections of the state governments to include petroleum in the GST ambit. They fear that the inclusion will result in a significant loss of revenues and the power to use the tax rates for various socio-economic objectives. This article will argue that the states’ concerns can be managed and mitigated through the levy of a supplementary excise tax without compromising the essential design and the objectives of the GST. The current structure of petroleum production taxation is complex, inefficient and time-consuming. Several factors have contributed to this state of affairs. First, petroleum products are subject to a plethora of central and state taxes that include Cenvat, service tax, CST/VAT, entry tax/octroi, National Calamity Contingent Duty (NCCD), oil cess and royalty. Each of these taxes is levied at specific tax points. For example, Cenvat is levied at the factory gate on the transaction value of the goods cleared from the factory; service tax on the invoice value of the service provided and NCCD on the quantity of crude extracted. Moreover, tax rates vary from product to product and across states. Thus, VAT on motor gasoline in Karnataka is 25%, whereas in Maharashtra it is 26% plus Re 1 per litre and in AP it is 33%. Against this backdrop, tax administration is not complex and time-consuming.
Second, the current tax framework is replete with ambiguities that cause delays and litigation. Four questions will illustrate this point. 1) Is a transaction involving the supply of an oil rig with specialised operating staff a ‘good’ or a ‘service’? It constitutes the provision of a ‘good’ (viz heavy equipment) but it also provides a ‘service’ (operating personnel). The answer is important as VAT is chargeable on a good ‘service tax’ on services. (2) Is the point of sale for crude oil the well head or the refinery gate? An oil producing state will claim it should be the well head and it will levy VAT; the oil producing company will argue it should be the refinery gate and (assuming the refinery is located in a state different from the state in which oil is produced) claim that it should be subject to the relatively lower central sales tax. (3) Should Maharashtra levy taxes on an advertising company based in Mumbai but producing ‘products’ that are displayed only in Kerala or should Kerala? Where is the ‘origin’ of the service provided? (4) How should credit be apportioned for taxes that are levied on capital and service inputs but that are used in the production of products that are tax exempt (e.g., natural gas) and also taxable (e.g., crude oil and refined products)?
Third, the current structure blocks the credit of taxes paid on inputs used in many instances, leading to increased costs on account of cascading. Whilst exploration and production is exempt from Cenvat, the services and capital inputs that are critical for its success (surveys, transportation, cargo handling) are taxable. These taxes are not recoverable and there is a cascading of tax costs across the value chain. This also creates distortions and inefficiencies and raises the cost of investment for the oil companies. Exclusion of petroleum from the GST scope will mean that no credit will be allowed for any GST paid on capital investments and other inputs acquired for use in exploration, production, refining or transportation of petroleum. Experts have estimated that the cost burden of this non-recoverable tax on the industry will be about Rs 30,000 crore annually.
All the ambiguities and complexities will become redundant if the petroleum sector is brought within the ambit of GST and all input taxes are made creditable. Else they’d perpetuate and lead to new layers of complexities. These problems are known to the finance ministry. They recognise that the current system is too complex and that ideally petroleum should be included within GST, as has been brought out in their response to the empowered committee’s First Discussion Paper. But they have apparently decided not to push for it because the opposition of the state governments to this measure may delay implementation of GST in its entirety. Their logic is “let not the best drive out the good”. The point is that the best is attainable. There is a solution wherein the states can meet their revenue objectives; the Centre can derive the fullest benefits of tax rationalisation and the oil companies can be unshackled from a distortionary and complex tax structure. That solution lies in the levy of a supplementary/excise tax. I am told that such a tax has been recommended by the 13th Finance Commission; that it has international precedence; that it can be set independently of the GST tax rate and that it will not compromise the GST design or stability of the rate structure. If this is the case then the Centre must expend the effort to persuade the states to accept this win (Centre)-win (state)-win (company) solution.
