Why GST inclusion of natural gas is a crucial factor for gas producers and distributors

The stocks of the natural gas producers and distributors reported buoyancy on Thursday following the Prime Minister’s statement to bring gas under the Goods and Services Tax (GST) regime and a commitment to invest Rs 7.5 lakh crore in the country's oil and gas infrastructure. Stocks of ONGC NSE -5.06 %, GSPL NSE -4.12 %, Indraprastha Gas, and Gujarat Gas gained by 4-9%.

The inclusion of gas under the GST regime may boost the gas volume and benefit companies across the value chain from upstream (ONGC, Oil India NSE 1.27 %), mid-stream (GAIL NSE 1.61 %, GSPL) and downstream (Indraprastha Gas, Mahanagar Gas, and Gujarat Gas).

At present, natural gas attracts central excise duty, state VAT, and central sales tax. VAT varies significantly among states, for instance 14% in Madhya Pradesh, 14.5% in Uttar Pradesh and Andhra Pradesh, and 15% in Gujarat. The CNG price includes excise duty of 14% and value-added tax (VAT) of 5-24% in the gas-consuming states. A GST rate of 5-18% if applied may bring down selling prices substantially thereby improving competitiveness of these fuels compared with the alternative fuels. Currently, CNG price is nearly half of petrol and diesel prices.

  

 

In addition, the input tax credit facility under the GST regime will help companies with a higher proportion of industrial clients. Gujrat Gas for instance derives nearly 70% of total volume from industrial consumers. The gas-based industries currently do not avail input tax credit on VAT paid on purchase on natural gas, this consequently increase cost of production for industrial consumers.

GAIL may avail input tax credit and remove the stranded tax — a mismatch of tax on output and input services -- from consumption of gas in LPG production, petrochemical and internal gas consumption in gas transmission.

Gas producers including ONGC and Oil India will also be able to recover input tax credit on operating expenses linked to natural gas. Natural gas accounts for more than 40% of the domestic hydrocarbon production of these two companies.

The gas consumption in the first nine months of FY21 dropped by 5.4% to 45,124 million metric standard cubic metres (mmscm). The liquified natural gas (LNG) consumption rose by 0.3% and accounted for 55% of the total gas consumption and the balance was from domestic sources of gas, the data from PPAC showed.

The fertilizer sector is the largest gas consumer accounting for 29% of the gas consumption, followed by 18% offtake by the city gas distributors, and 17% by power producers. The gas contributes nearly 6% of India's energy mix. The government plans to push it to 15% by 2030.

Source::: The Economic Times,  dated 18/02/2021.