GST to have negative impact on oil and gas industry: ICRA

16 Aug 2016 Evaluate

Domestic rating agency ICRA in its latest report has stated that the impact of the GST will be negative on the oil and gas industry due to the compliance with dual taxation regimes and non-creditable tax costs. It added that not just that, the new taxation regime will impose an additional burden on the industry due to compliance to a dual tax regime but profitability of the industry could also be modestly hit because of tax-related under recoveries.

As per the report, GST law in its present form excludes a major portion of the oil and gas industry products as well as tobacco and liquor. Five petroleum products - crude oil, natural gas, motor spirit, high speed diesel and aviation turbine fuel are excluded from GST at present but would be included at a later date, while other products such as Liquefied Petroleum Gas (LPG), naphtha, kerosene and fuel oil are included. Therefore, the industry would have to comply with both the current tax regime as well as the GST regime.

ICRA further said that it would result in non-creditable tax costs wherein a refiner will pay GST on the procurement of plant, machinery and services for production of Motor Spirit (MS), ATF and Diesel. However, the input GST would not be creditable against the excise duty and value added tax levied on these fuels. Crude Oil, MS, ATF, HSD and natural gas constitute a significant share of the production of the upstream and downstream industry; keeping these out of the ambit of GST would bar the oil and gas industry from most of the benefits of GST.

The report said that because of non-creditable tax costs, profits of refining and marketing companies could be modestly hit, as the pricing of petroleum products are governed by specific formula (Import parity and trade parity), unless the government allows them to pass on the tax related under recoveries to consumers and also highlighted that there were several other issues where there was lack of clarity, such as whether offshore supplies to the upstream sector to be subject to central, state or integrated GST; whether natural gas includes compressed natural gas, liquefied natural gas, piped natural gas; whether GST subsumes NCCD and cess levied on crude oil, whether losses during storage constitute self consumption or supply etc. Also, excluding crude oil and natural gas from GST has an inflationary impact on the prices of other downstream products produced from these feed stocks such as naphtha, kerosene, petrochemicals etc.

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