Why Should India Include Natural Gas In GST?

Urvi Shrivastav

The central government has indicated that it may bring natural gas under the ambit of GST (Goods and Services Tax), earlier than expected. Presently, diesel, jet fuel, crude oil, and natural gas fall outside the GST ambit. However, several industry groups want gas to come under an indirect tax regime. As per the Ministry of Petroleum and Natural Gas, world’s average natural gas share in the primary energy basket is about 24 percent. In India this share is just 6%, intending to increase it to 15%. Thus, natural gas as a fuel choice is on the rise world over.

Since 2014 and onwards, the Government of India is consistently taking initiatives, revamping existing policies and framing new ones, all working towards making India a sustainable, gas-based economy. However, the fact that Natural Gas is presently not covered under GST is a major bottleneck in this direction. Industry experts have also spoken in favor of bringing natural gas under GST. There is thus a unanimous demand in this direction. How is this possible?

The inclusion of natural gas under the GST regime would do away with the existing central excise duty and many folds of value-added taxes (VAT), which is imposed by states. It will thus reduce the impact of cascading taxes on the power and steel industry, as well as the end consumer who has to face the brunt of exiting taxation. We can see this clearly in the rise in petrol price, where the common man is paying the cost of inflation. Also, the gas transportation cost, which varies across states will become more uniform. This would lead to an increase in the adoption of natural gas pipelines and usage. 

The petroleum ministry secretary Tarun Kapoor, in a media address confirmed there is a demand from the energy sector to impose GST on natural gas. Gas is presently bought at the cost of $1-1.5 million metric British thermal unit (mmBtu) and has a landed cost of around $3 per unit, which multiplies, after going through various stakeholders in the gas supply chain, to become $8 per unit for customers, the Petroleum Ministry has noted.

Another plausible reason for natural gas gaining traction with the government is India’s 2015 commitment to the Paris Climate Change accord. The world is speeding towards renewables with natural gas at the forefront. 2014 onwards, the Government of India is consistently initiating, revamping, and framing new policies towards making India a gas-based economy. India aims to achieve 175 Gigawatts of renewably sourced and clean energy by 2022, as was declared by Prime Minister, Narendra Modiduring United Nations New York Climate Week in September 2020. 

Another reason why bringing natural gas under GST is advisable is the democratic fabric of India. The subject of “energy” comes under the concurrent list of the 7th schedule in the constitution. Decisions can be made by center and state both on this subject, with center taking precedence. The GST Council, which is the decision-making body on GST, comprises of state and central representatives making the taxation decision inclusive, democratic, and federal. This matter is however still under government consideration.

Further, natural gas presently does not have the advantage of a common market. Complying with the current tax regime would increase non-creditable tax costs which would have an inflationary impact on the overall economy. A fragmented taxation system will also perpetuate tax inefficiencies, complexities, disputes, red tape, and administrative hassles – the very ills GST is designed to overcome. Better governance is thus one additional incentive for bringing natural gas under GST.

The government is taking note of the importance of natural gas is taking the initiative to make India a gas based economy, such as extending piped natural gas to ten million houses over the next five years, along with the expansion of the existing National Gas Grid Network from its current length of fifteen thousand kilometers pipeline to thirty thousand kilometers. The inclusion of gas in GST will put a rubber stamp in making the move towards such an energy economy shift. As per the information published on Ministry of Petroleum and Natural Gas website, marketing and pricing freedom is progressively being provided for new gas fields from 2016 onwards. This will attract greater investment in exploration and production tasks while enhancing Liquified Natural Gas (LNG) import capacity. This will be done by developing new terminals and augmenting existing capacities, as well as connecting the eastern and north-eastern parts of the country. Presently, we have new gas grids in operation by developing the 2650-kilometer Pradhan Mantri Urja Ganga Project and the 1565 kilometer North-eastern Region Gas Grid Project. The government has infused capital support of Rs. 10,676 crores, to make gas accessible in remote areas. The country presently has over 16,800 km of gas pipeline with another 14,700 km of gas pipelines under construction. The government bringing natural gas under GST is another positive move to promote natural gas

Natural gas is promoted world over today, with the Indian government expanding gas projects at a fast pace.

Note: This blog is a re-post of the original posted on the Business World website.