The Union Budget 2024 is on the anvil and the anticipation for various tax-related proposals across sectors is growing. The oil and gas sector too has an elaborate wish list seeking policy initiatives and reforms to boost domestic oil production and exploration, incentivising green hydrogen projects, measures to increase the consumption of gas and adoption of alternative fuels.
The pivotal concern of the sector has been the inclusion of petroleum and natural gas under the GST framework. It is relevant to mention that while enacting the Constitution 101st Amendment Act, 2016, petroleum products were consciously included within the scope of the GST legislation (unlike alcoholic liquor for human consumption), however, the levy was deferred. Therefore, while the levy on such products is imposable only upon the recommendation of the GST Council, an announcement in the Budget of the Government’s intent to realise this goal soon will certainly be a step forward in this direction.
A GST-based taxation system for the oil and gas sector is imperative to alleviate the adverse economic consequences being faced by producers due to exorbitantly high taxes and production costs on account of rising global crude prices. Further, the varying rates of VAT being imposed by various states on these products being replaced by a uniform rate of GST will aid in addressing the disparity in fuel prices across the country. It is needless to add that a seamless flow of input tax credit will lead to significant cost savings and unlock supply chain efficiencies, thus encouraging greater investment opportunities in the sector.
The inclusion of natural gas in GST will be in line with the Government’s strategic goal to achieve net zero emissions by 2070 and increase the gas share in the overall energy mix. The Government mandate for implementation of phased mandatory blending of compressed biogas (CBG) with CNG and PNG is a key step towards moving to a gas-based economy and transition to green energy. To further bolster the growth, the industry is expecting fiscal incentives to encourage setting up more CBG plants, directives for pipeline connectivity to CBG plants to allow greater production and offtake of CBG along with enhanced support for research and development in the biogas space.
Navigating the complex political landscape is the biggest challenge in the journey towards realising the goal of a uniform tax landscape for oil and gas sector. Considering that VAT/sales tax levied by States on petrol, diesel, and natural gas accounts as the major revenue source, reaching a consensus among the Centre and States will be a mammoth feat. In a PIL filed before the Hon’ble Kerala High Court, the Court had directed the Union Government and GST Council to furnish reasons for not including the said products within the ambit of GST. However, the 45th GST Council meeting witnessed vehement opposition from several States to the proposal, resulting in yet another deadlock.
The concern of revenue loss for States may call for a compensation mechanism, and the Centre is unlikely to tread this path. Apart from this, GST rate determination will be another challenge, considering the existing revenue share of the Centre and States from excise and VAT respectively. Any anomaly in the GST rate structure could lead to price volatility, which in turn could fuel political resistance and opposition, defeating the very purpose intended to be achieved through any such reform.
Although the industry remains hopeful and geared up for the inclusion of oil and gas under GST, it remains to be seen whether the Budget can facilitate the much-awaited breakthrough on this front, or will it be yet another hit-and-miss.
The article is co-authored by Anshul Mathur, Executive Partner & Ishita Goyal, Principal Associate at Lakshmikumaran & Sridharan Attorneys
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