Finance Minister Arun Jaitley has written to all Chief Ministers urging them to reduce Value Added Tax (VAT) on petroleum products used in the manufacture of goods as the current system was leading to cascading of taxes on such goods under the Goods and Services Tax (GST) regime.
Currently, crude oil, natural gas, petrol, diesel and aviation turbine fuel are out of GST purview. All other petroleum products fall under the new indirect tax.
“The letter by Finance Minister highlights a concern being raised by the manufacturing sector in the country regarding the rise in input costs of petroleum products happening on account of transition to Goods and Services Tax regime,” the Finance Ministry said. “In the post-GST scenario, manufactured goods attract GST while inputs of petroleum products used in the manufacturing attract VAT and, therefore, it would lead to cascading of taxes.”
“These products are a principal source of revenue for the states, so that’s why they were kept out of GST,” Anish De, partner and head, strategy and operations advisory (infrastructure) at KPMG in India. “There was always a concern about input tax credits. There is logic in what the Finance Minister has said since it was pointed out earlier that there would be an inflationary impact. The question is whether the states will abide by it. The financially better off states might agree, but others might not.”
The view also is that this cascading of taxes due to the applicability of VAT would affect natural gas companies more significantly, since the alternatives to natural gas, such as naphtha, fuel oil and LPG are under GST.
“When a company sells piped natural gas, it is under VAT,” K. Ravichandran, senior vice president, group head — corporate sector ratings at ICRA said. “It cannot be set off under GST, so it becomes an additional cost. But alternatives to natural gas come under GST and so input credit is available.”
The overall view is that it would eventually be more practical to include all petroleum products under GST.
“It would have been better to include petroleum in GST,” Mr.De said. “Eventually the solution would be to include it all in GST, there is no other practical way.”
“The revenue foregone by bringing natural gas under GST would be minimal, but the effect on companies is significant,” Mr. Ravichandran added. “I don’t think states will reduce VAT on petrol, diesel, and ATF since they are major revenue sources.”
