As states agree to cap VAT on natural gas at 5%, uniform petroleum tax may not remain a distant dream

NEW DELHI: States have agreed to cap value-added tax (VAT) on natural gas at 5 per cent and lower it on other petroleum products such as petrol and diesel used by the manufacturing sector as an input. That could mark a significant breakthrough toward uniform nationwide prices of petroleum goods. The Goods and Services Tax (GST) Council will take up the scheme once it is formulated by the states.

“The council will take a final call on the proposal,” a senior government official told ET. “There have been discussions between the Centre and states at the officials’ level.” The council had previously discussed the issue and it was decided to ask the states to work out a scheme. Another government official said the ball was in the states’ court. Petroleum products aren’t covered under GST.

The Centre had been keen to bring petroleum products under ambit of GST, which was implemented on July 1, from the start. But states, which get a substantial chunk of their revenue from the sector, did not support the move.


If states ratify the proposal, it could well pave the way for uniform taxation of petroleum products. Petroleum minister Dharmendra Pradhan had on Wednesday made a strong pitch for the inclusion of petroleum products under GST. “It is high time the GST Council consider bringing petroleum products (within) the ambit of GST,” he had said.

State Support
Discussions by state officials have veered around to the understanding that the VAT rate on natural gas can be capped at 5 per cent and lowered on other petroleum products to ensure that the viability of industrial units, especially in sectors such as fertiliser and steel, are not impacted.

It was earlier proposed that central sales tax (CST) be amended to ensure that the cost of production or manufacture of goods covered under GST did not increase sharply.

Manufacturers can’t avail of the facility, under what was popularly known as the C Form, that allowed them to source petroleum products from another state by paying 2 per cent CST instead of VAT levied locally in the state.

They now have to get petroleum products after paying the prevalent VAT rate ranging from 15 per cent to 30 per cent. This is a double blow for manufacturers as they not only have to pay higher tax but they also can’t claim any input tax credit on petroleum products under the GST regime.

“With the introduction of GST, facility of issuing Form C (and purchase at 2 per cent CST) for purchase of fuel used in manufacturing was done away with,” said Pratik Jain, leader, indirect tax, PwC. “Also in a few states VAT paid on fuel was used as input credit (either in whole or part), which is also not available now, as the manufacturer has to pay GST on output. This has resulted in incremental costs for many businesses.”

To make matters worse, some states have imposed entry tax on petroleum products imported into their states. That’s because states don’t want manufacturers to import petroleum products at a concessional rate of 2 per cent fearing loss of revenue. The states are apprehensive that all manufacturers would buy petroleum products from another state and avoid paying local VAT.

But this could seriously impact manufacturing, which is already facing turbulence. A higher tax without any input tax credit could render the sector uncompetitive and hurt the government’s endeavour to spur investments and job creation as part of its economic revival programme.

“If a mechanism like Form C cannot be introduced again, then lowering the VAT rate across states is the only viable option,” said Jain. “In addition to bringing down the manufacturing cost, it will also bring uniformity in tax rates across states. Hopefully, this will form a base to include petroleum products within GST in next couple of years.”

The departments of fertiliser and steel have already sounded the alarm and raised the matter with the finance ministry as these sectors could see a big jump in liabilities if the situation doesn’t change.