Natural gas in India is currently outside the ambit of goods and services tax. Despite being constitutionally included under GST, the tax regime on natural gas remains fragmented, with excise duty levied by the central government and value-added tax (VAT) imposed by individual states. These taxes, between 11 per cent and 15 per cent, are not eligible for input tax credit (ITC).
The inclusion of natural gas under GST, expected to be deliberated in the GST Council’s meeting on December 21, could simplify this tax structure.
Uniform Tax Structure: Under GST, natural gas will transition from a dual-tax structure of excise and VAT to a unified rate across states. This simplifies compliance, reduces administrative costs and eliminates the cascading effect of taxes.
Eligibility for Input Tax Credit (ITC): Suppliers such as petroleum companies currently cannot claim ITC (GST) on their inputs since their ultimate output is not under GST. With GST inclusion, they will be able to offset these taxes, leading to lower production costs.
Competitiveness: By lowering input costs both at the manufacturer’s and consumer levels, industries will become more competitive domestically and internationally. This is particularly crucial for energy-intensive sectors.
Lower Production Costs: The cascading effect of non-creditable taxes inflates the final cost of goods and services. With GST inclusion, manufacturers can pass on savings to consumers, making essential goods affordable.
Enhanced Supply Chain Efficiency: Unified taxation reduces logistical inefficiencies.
Industry benefits
Steel & fertilizer sectors: These sectors use natural gas as a primary fuel or feedstock. Tax savings from ITC will reduce the cost of production, allowing these industries to offer more competitive pricing.
City Gas Distribution: Inclusion under GST will lower the cost of piped natural gas (PNG) for households and compressed natural gas (CNG) for vehicles.
Chemical and Pharma: With ITC availability, these sectors will benefit from lower costs of raw materials, improving margins and enabling affordable pricing for critical products.
Textiles, ceramics: Energy costs represent a significant portion of production expenses in these sectors. Tax credits under GST will directly reduce operational costs, making Indian products more globally competitive.
Government benefits: At present, a tax administrator has to maintain two sets of tax administrations i.e. one set to administer excise (central) and VAT (state) and the other set towards GST. Once, it is included under GST, there would only be a need to maintain one set of administration for GST.
Challenges
State revenue: States currently earn significant revenue from VAT on natural gas. To secure their buy-in, the central government may need to propose compensation mechanisms.
Rate Determination: Setting an appropriate GST rate is critical to ensure that tax revenues remain stable while still providing relief to industries and consumers.
