Finance Minister Arun Jaitley has urged state chief ministers to reduce sales tax or value-added tax (VAT) on fuels that have been kept out of the purview of goods and services tax (GST) but are used as input for products that come under the new indirect tax regime. Since the advent of GST in July 2017, states have turned down the Centre’s request to bring natural gas within the ambit of GST.
Crude oil, petrol, diesel, natural gas and jet fuel have been kept out of GST as a compromise between the Union and state governments to get the latter’s support for the new indirect tax. Tax on petroleum, which is easy to collect, roughly accounts for about 30% of state tax revenues.
Under the new indirect tax regime
Under the new indirect tax regime, manufactured goods attract GST while the inputs of petroleum products used in the process attract VAT, leading to a situation of tax being levied on tax. Credits for taxes paid on raw materials under one tax system cannot be used for adjusting the final tax liability under another system.
“In the pre-GST regime, certain states had lower rate of 5% VAT on compressed natural gas (CNG) used for manufacturing goods. Some states also had lower rate of VAT on diesel being used in manufacturing sector. VAT on diesel ranges from 17.4% in Delhi to 31.06% in Andhra Pradesh. On natural gas, it varies from nil to 15%.” said the ministry statement, adding that Jaitley requested other states to also lower the rate of VAT on petroleum products used in production. The primary motive is to minimize any disruption in the costing of goods.
Scheme to get refund of the tax credits
Natural gas is used in manufacturing fertilizers, petrochemicals and a variety of products such as glass, and an increase in their cost could impact inflation. Besides auto fuels such as petrol and diesel, crude oil refining also yields naphtha, a liquid hydrocarbon that is the building block of many petrochemicals used in different industries.
While other industries can claim input tax credit or set off tax paid on inputs with that paid on the final product, these industries cannot do so as crude oil, three petroleum products and natural gas are out of GST’s ambit. This raises cost for the industries using either of the five products as inputs. These manufacturers have been asking for a scheme to get refund of the tax credits that they are not able to use in the GST regime. An official of the GST Council, the federal indirect tax body, who spoke on condition of anonymity, said that it was not considering any such proposal.
Natural gas alternatives
Natural gas alternatives such as naphtha, fuel oil and LPG are already included in the GST list. While LPG will be taxed at 5%, naphtha and fuel oil will be taxed at 18%.
Jaitley has requested other states also to explore the possibility of having a lower rate of VAT on petroleum products used for manufacturing of those items on which there is GST, so that there is minimum disruption in the costing of goods.