The Hindu Business Line : Gail urges States to cut sales tax on natural gas

Currently, sales tax on natural gas is levied at 20 per cent on an ad valorem basis by most States . As a result, the tariffs for gas are close to equivalent to about $4.6 per million British thermal units (mmbtu).

Gail, currently, sources its gas from Qatar's Ras Laffan Liquefied Natural Gas Company Ltd (RasGas). The delivered cost of liquefied natural gas at the Dahej terminal was estimated to be in the region of about $3.75 per mmbtu. Inclusive of sales tax and transportation costs, the effective tariff at the customers' end was about $4.6 per mmbtu. This was based on Gail's billing to Gujarat Industries Company Ltd (GIPCL).

The sources said that none of the States were prepared to switch over to the value-added taxation for natural gas. States have said that the main hitch was that there was very little or no value addition component to gas for taxation purposes.

Without exception all the States have therefore preferred to retain the ad valorem method, where tax revenues are assured.

As a result of these high taxes, fertiliser and power plants were still reluctant to switch over to gas as feedstock for their respective units. Sources said, "Many of the power and fertiliser plants find this tariff on the high side. This is especially for power utilities who find that variable high."

Besides, the Ministry of Power has already indicated that irrespective of the fuel costs, the criterion that would be applied was affordability. Accordingly, the benchmarked power tariff was about Rs 2 a unit. This in turn implied that gas-based power stations would have to conform to this tariff.

At the prevailing gas prices, fuel costs translate to over one rupee a unit. State utilities have therefore sought a reduction in gas tariffs from supplies made by Gail. Gail/Petronet, however, was not in a position to reduce the base tariffs and have opted for tax reduction to bring down tariffs in view of the contractual arrangement with the suppliers.

So far only Reliance Industries has been able to price the gas close to the benchmarked tariff, which was about $2.97 per mmbtu for supplies to the Gandhar and Kawas gas-based power stations of the public sector National Thermal Power Corporation Ltd.

Inclusive of sales tax and duties, this tariff works to about $3.26 per mmbtu. This translated to a variable cost of about 0.70 per unit. (This is assuming one mmbtu - 0.0034kilo watt-hour).

Part of the reason for the large difference in Gail and RIL gas tariff was the latter's low fixed costs. Gail sources the gas in the regassified liquid natural gas form. Accordingly, the costs of liquification and shipping costs are also loaded on to the tariff, leading to an increase in tariff.

Sales tax exemptions, the sources said, would bring down the tariff to under $4 per mmbtu, inclusive of pipelining costs. Accordingly, the sources said that power tariff generated through gas plants would be in conformity with the Power Ministry, the sources added.

Besides, the sources added, that any tax reductions or exemptions were also likely to benefit NTPC plants as well. This would imply that they would be in a position to bring down the fuel component of power tariffs closer to 50 paise a unit, the sources added.

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