GST and Petroleum Sector: By CA Rashmi Jain

GST and Petroleum Sector-Will non-inclusion of Petroleum Products in GST cause inflation? Yes, say the experts.

We are the third largest consumer of crude oil with a consumption of 4.2 million barrels per day (calendar year 2015 data).  US top and China is number second. When we consider the petroleum sector’s contribution to India’s GDP, then, I must say there cannot be a true GST regime without petroleum sector in GST.  It is bound to create economic distortions and tax inefficiencies and impact will be profound. VAT rates on diesel; for example, varies from 16 per cent (Delhi) to 29 percent (Mumbai)

Constitutional Amendment Bill has proposed to exclude five petroleum products viz. crude oil, natural gas, petrol, diesel and aviation turbine fuel, from the ambit of GST initially, to be included later, on the recommendations of the GST Council, whereas, other petroleum products (kerosene, naphtha, LPG) come within the ambit of GST.  In the present indirect regime, there is no excise duty on crude and natural gas; consequently industrial enterprises who extract crude and natural gas, become ineligible to avail cenvat for excise duty and service tax paid for finishing these activities. And no doubt that all such taxes that are not eligible for cenvat credit are a tax cost to these industrial enterprises. In GST regime goods and services used by such industrial enterprises shall stand covered under GST Regime, whereas crude and natural gas would be outside GST, as mentioned above. Once again, credit of GST paid on goods and services used for these activities again would not be available. Further, since petrol, diesel and ATF are subject to excise duty, refineries are able to avail credit of the excise duty and service tax paid on the goods and services used in the refinery and can offset the same against the output. Exclusion of these products results in a peculiarity wherein the input (except crude) for the sector is subject to GST, whereas the majority output is outside the purview of GST. This would result in reversal of the majority credits that otherwise would have been available and would further distort the credit mechanism.  Further, the petroleum sector now has to comply with the present ED, VAT and CST legislations etc. and the GST regime requiring registrations under CGST, SGST and IGST under each State of their operations.

The real intention of GST is to minimize the cascading effect created by multiple taxes in the existing system and if exceptions are carved out then it will drastically effect the true spirit of GST reforms cum regime in India.