Impact of GST on Indian Oil & Gas Industry

“And some day, pundits of economics, pundits of management and pundits of technology will certainly undertake researches and write about India’s GST experiment as a model for the world. It will become a case study for universities across the world,” so said our Honorable Prime Minister in his monthly radio summon on 30^th July, while informally christening GST as ‘Good and Simple Tax.’ Eulogising this tax policy without properly anticipating the impact of GST, PM Modi’s government has been bowling googlies to the public, which is clearly on the backfoot since demonetization.

GST, it seems, was an anticipated bouncer, albeit an unplayable one. And it seems to have hit the Indian Oil and Gas industry right on its helmet grille.

On paper, GST makes all the sense. I mean, who wouldn’t want to club all tax slabs into one to save money, tax filing time and have generally better transparency. Almost all the central and state taxes (16 to be precise like VAT, Sales Tax, Excise Duty, Luxury Tax, etc.) have been subsumed under GST, and one cannot overlook the bright side of taxing the supply and not the final goods, thus negating duplication of taxes. But why have crude oil, natural gas, motor spirit, high-speed diesel, and aviation turbine fuel (jet fuel) have been left out from this kitty? These categories will continue with the current state and central tax compliances. And to make things matters a few notches worse, end user (downstream industry) products like LPG, kerosene, naphtha, fuel oil, etc. are included under GST. Sounds complicated? It is. Let’s dig a little deeper into it for a better understanding.

Non-Creditable Tax Cost

As the GST framework outlines, the tax credit cannot be transferred from one tax framework to another. Simply put, oil and gas companies will pay GST while procuring heavy machinery, ancillary goods, and services; but will not be able to pass it on during the sale of the above five mentioned products, thus absorbing the paid GST as operating and capital expenses. The GST paid at this stage will not be reimbursable against the sale of crude oil to other companies for refining purposes. And what happens to these additional costs that companies are slapped with? You’re right; it becomes a really expensive game of ‘tag’, with the additional cost being passed on the end-user, thus pushing up the prices of petroleum products in the market.

This is also true for the products that are under the GST ambit now. Products such as LPG, kerosene, have been brought under the flat 5 per cent GST tax bracket. They were earlier categorized as subsidized products and enjoyed 0-5 per cent VAT, depending on which Indian state we were in. This move will also bump the prices of these end-user products.

Trickle Effects

When you throw a stone in the middle of the lake, consequent ripples are felt till far-fetched corners. And the end user is not far from experiencing the ripples in the form of price escalations. Piped Natural Gas (PNG) is a fuel of choice for heavy steel and infrastructure industries. Along came GST and brought the tax rate down on many competing from 28 per cent to 18 per cent, but, oddly enough, PNG has been left out. Although the Finance Ministry has proposed a 5 per cent tax rate for PNG, finished products using PNG still cannot get a tax credit, making it a less attractive industry fuel. Furthermore, other finished products of PNG, such as petrochemicals, CNG, power, etc. are looking at a price hike.

LPG is the simplest example of GST affecting all of us. Our cooking gas is currently experiencing differential tax rate with domestic consumption it is at 5 per cent while commercial is at 18 per cent. The industry is voicing its concerns regarding this disparity as it can lead to tax diversions. The Federation of Indian Petroleum Industry has filed a petition with the government regarding this. Also, in a few states, including Delhi, there was nil taxation on LPG till GST came along, which is now 5 per cent.

Further, on the same thought, auto-LPG is going to lose its sheen as a fuel of choice in the coming months because of it being taxed at 18 per cent; while its competitor, CNG, is in the 5-per cent tax bracket.

Further Woe

Non-creditable tax cost aside, with GST being implemented the industry will also have to deal with stranded taxes on non-availability of credit on locally purchased goods, implementation of GST on stock transfer, inter-state sale and purchase of goods, etc. For example, there are approximately Rs 5230 crores worth of taxes collected by states that are available as credit to the buyers or manufacturers, subject to input credit in inter-state supplies. However, since 1^st July 2017, this large sum of money will be blocked as there will be no way to claim it as input credit on manufactured goods. Upstream manufacturers and procurers will lean more heavily towards short-term lending to cover interim costs, again, bumping up lending rates.

Read how the new exploration policy, HELP is going to impact the Indian Oil & Gas industry

Way Ahead

Directly or indirectly, it’s clear that GST is bound to have a negative impact on the Oil and Gas Industry in India. However, the government may include these five excluded products under the GST ambit after two years. Questions on why they were left out in the first place and why a 2-year gestation period aside, dual taxation in the industry will lead to inflationary pressures. However, there emerges a ray of hope in India’s oil consumption demand, which is slated to grow by 7 percent to 4.13 million barrels per day.