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GST to Prove a Challenge for Oil & Gas Sector in the Short Run

Dual compliance and confusion over input tax credit redemption are key challenges that still remain in the hydrocarbon sector. It remains to be see whether the world’s 3rd largest oil consumer can ensure smooth GST implementation in this key sector

Oil is perhaps the most precious commodity for the Indian economy; India consistently ranks as one of the highest net energy importers in the world and energy trade in India is a very delicate issue. It is thus, important to view hydrocarbons through the prism of the GST and see whether we can glean something of the future from the current day data. Experts from TechSci Research weigh in on the matter:

The GST implementation for the oil industry is slightly different from the GST implementation for other industries, primary for strategic, economic and social reasons. India will roll out GST for most goods and services but excluding crude oil, natural gas, petrol, diesel and jet fuel. Other oil products such as kerosene, liquefied petroleum gas and naphtha are included in the GST. This becomes somewhat confusing because of the GST input tax credit issue. Companies can claim a tax credit on inputs that they have already paid a tax on. For example, if a tax payable on a final product is Rs. 500 and the final component is built out of two other purchased components on which a tax of Rs. 300 is paid, then the central government will provide a tax credit equal to the difference between output tax and input tax (Rs. 200 will be the credit, in this example). Not only will oil companies have to comply with both the old and the new tax regimes, the tax credit also can’t be transferred between the two systems, thus making matters somewhat difficult for oil producers. Secondly, the other problem is that any delay in transferring of tax credits from the government to the assesse would result in decline in capital expenditure. Companies would prefer to reinvest profits and other income back into the company, delay in transferring credits would lead to blockage of working capital for said companies.

Dual compliance is also supposed to be a major hurdle. Some of the major Value-Added Products in the Indian economy include LPG, Kerosene, Naphtha, ATF and HSD in addition to crude oil and gas. Crude oil, natural gas, HSD and ATF would continue to attract taxes under existing law -- Excise Duty, VAT/CST, OID Cess, NCCD, and Royalty -- whereas LPG, SKO and Naphtha would now figure under the GST umbrella. This creates a complex structure for producers who will be taxed under two regimes for two different sets of products that emanate from the same source. However, some key stakeholders are decidedly positive on the GST. In the words of Prashant Modi, Chief Executive Officer and Managing Director of Great Eastern Energy Corporation, India’s first coal bed methane producer speaking on the GST, “this is a very positive move for the energy sector. Also, natural gas being a clean and environment-friendly hydrocarbon should be brought under the GST at 5% at the earliest in order to enhance domestic production and consumption. This will also help in achieving reduction in the import of LNG.”

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