India will soon witness the biggest tax reforms since Independence, when the Goods & Service Tax (GST) gets introduced.
GST will rationalise the Indian indirect tax system by amalgamating Central and State levies such as excise, service tax, VAT and CST into GST.
In GST, ‘supply’ of any goods or service will be taxable, instead of the current system where different ‘taxable events’ such as manufacture, sale, import, trigger different tax levies.
GST is a welcome change for all stakeholders. However, the oil and gas sector will be left in the cold as five key petroleum products — crude oil, petrol, diesel, aviation turbine fuel and natural gas — will be excluded from GST as proposed by the 115th Constitutional Amendment Bill, 2011.
As we write, this Bill is under deliberation by a Parliamentary Standing Committee.
Get it right now
Constitutional amendments ensue from a long and arduous process. So while amending the Constitution for GST, we should get its design right before the process gets underway. We would have no scope to amend it later.
Hence, GST should be comprehensive, excluding no goods or services.
A truncated GST will split the value chain into water-tight GST and Non-GST compartments and perpetuate tax inefficiencies, complexities, disputes and administrative hassles. These are the very ills GST is supposed to eliminate.
Further, it will require retaining old tax laws for non-GST (petroleum) products running parallel with GST.
Other undesirable features of the old system, such as C and F forms for inter-State sale/movement of goods, will continue.
Today, the oil & gas sector is governed by a complex, multi-layered tax system at the Central and State levels.
For instance, central excise duty on petrol and diesel is based on specific rates (to minimise inflation), whereas the States levy VAT on an ‘ad valorem’ basis. This anomaly too, will continue.
Taxes from Oil, Gas
The Indian oil and gas sector is the largest revenue earner for the Central and State Governments.
In 2010-11, it contributed 27.8 per cent of the total indirect tax collected by both Governments. Of this, the five petroleum products (to be excluded from GST) alone contribute around 96 per cent revenue (See Table).
If the GST excludes these products, 27 per cent (a little less than one-third) of all indirect taxes will remain excluded from the GST.
Thus, the GST will cover only a little more that two-thirds of all taxable revenues. Surely this is not enough to meet some of the stated objectives of GST, which is to make Indian goods and services more competitive internationally and to boost GDP growth.
Many economists, industrialists and even the current Chairman of the Empowered Committee have declared that just introducing GST will add 1-1.5 per cent to India’s GDP growth.
With the focus on GDP growth, it is all the better that petroleum products are included in GST.
Cascading effect
Excluding the petroleum products would mean the tax on these non-GST items (Rs 1,92,608 crore in 2010-11) will add to cost of GST goods and services, as cross credit won’t be available.
Assuming a 20 per cent cumulative GST (Centre and State) the additional tax would be Rs 38,522 crore! This is 5.41 per cent of all indirect taxes collected!
Again, assuming a 7 per cent annual growth in tax revenues, by 2013-14, the tax on non-GST items would be Rs 2,35,953 crore and the cascaded tax Rs 47,190 crore! This will add further to inflation and slow growth.
Today, Cenvat credit is not available on petrol and diesel. GST is a golden opportunity to rid this incongruity.
The anxiety of the States over fiscal independence and revenue collection can be addressed differently, without compromising the GST design by excluding petroleum products.
Oil-linked products
Another undesirable impact of the exclusion is the loss of credit on goods and services covered by GST received and used to produce non-GST products.
Today, credit is available on such goods and services. The exclusion will amount to a fresh dose of unintended taxation, by denying credit available today.
For instance, the oil exploration and production industry already suffers from the burden of excise, VAT and service tax on capital goods and services, while no credit is available on crude oil/natural gas. This situation needs correction.
In a VAT scenario, exemptions actually increase the overall tax burden by breaking the VAT chain.
If this is not bad enough, post-GST, an additional 8-10 per cent state GST on services will further increase operation cost.
This is because GST paid on consulting engineering services (in the oil sector), technical services, construction, erection and commissioning, and pipeline service will become ineligible for credit.
A GST that excludes major petroleum products will defeat the very purpose it is intended to serve. Revenue concerns need to be addressed differently without hindering tax reforms.
Apart from the oil and gas sector, other industries that consume petroleum products will also be adversely affected by the exclusion.
For instance, steel and fertiliser industries consume natural gas for production and as the primary feedstock.
Currently, natural gas is exempt from excise duty but leviable to State VAT on which credit is available.
This credit will be lost to steel and fertilisers units, if natural gas is excluded from GST.
It is, therefore, imperative that the Parliamentary Standing Committee recommends amendments to the Bill for a holistic GST covering all goods and services, in the interest of all stakeholders, without excluding petroleum products.
(The author is Head, Indirect Taxation, Essar Group.)