Double taxation is a deterrent to gas swapping between power producers

It is two years since the Government proposed gas swapping guidelines for end consumers, including the power sector, but the industry is yet to warm up to the move. The reason, say industry players, is high local taxes that make the delivered gas price commercially unviable.

The players affected include GMR, GVK and Lanco. “Swapping can be successful only if the taxation issues are resolved. States have been requested to bring down the value-added tax component. While some States, such as Gujarat and Andhra Pradesh, have shown their willingness, others like Uttar Pradesh are yet to acknowledge it,” an industry official said.

“No power producer will say no to swapping, but for the pricing,” another official said.

Almost 16,107 MW of gas-based power capacity is stuck. Of this 6,997 MW is based on gas from the Reliance Industries operated Krishna Godavari - D6 block.

The swapping issue has gained momentum yet again with the continued drop in gas production which, for April-October this fiscal, slipped by 5.6 per cent against the same period last year.

Taxed twice The country’s demand for gas is 230 million standard cubic metres a day (mmscmd), while its availability is 130 mmscmd, met through imports and domestic supplies. Gas demand is directly proportionate to supply. What is happening today is that the buyer ends up paying tax twice — first at the point of origin and then at the State-level, where it is delivered.

“If a supplier injects gas in one State, meant for a particular customer, into the common pipeline through an authorised carrier, and the carrier delivers an equivalent quantity to that customer in another State as per contractual arrangements, the transactions would constitute inter-State sales and are liable to CST (Central Sales Tax).

“This position has become debatable and hence the gas transporters are unable to certify the inter-State sale, leading to collection of VAT on both transactions,” the official added.

Make swapping easier As a result, despite the guidelines on swapping of natural gas issued in 2012, the policy has not found favour with consumers, who say that double taxation makes the swapping commercially unviable.

By executing swap agreements, customers on the West Coast can be provided imported gas, while power plants on the East Coast can be given domestic fuel. The guidelines on gas swapping do include a provision to reduce the tax burden on consumers, according to which customers can provide an indemnity bond to the supplier and transporter to ensure they are not exposed to tax claims from swapping agreements.

But consumers say the double taxation issue needs to be resolved for swapping to gain acceptance.

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