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Will bringing petroleum products under GST help tame inflation

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By Akhil Mehrotra

India, today, covers nearly the majority of its oil needs through imports. This is leading to a widening trade deficit; a weaker rupee and higher inflation as crude prices breached the $100 a barrel mark. This is no doubt going to be a major drag on growth. Bringing petroleum & natural gas under GST is a long-standing demand from the industry and the Government should begin consultations with the states to bring it under the GST.

Currently, petroleum products like petrol, diesel, ATF & natural gas are outside the ambit of GST and are covered under legacy taxes like VAT, Central Sales Tax, Central Excise Duty, etc. It results in an adverse impact on prices due to stranding of taxes in the hands of gas producer/ supplier, resulting in high prices of petroleum products for end users/ consumers.  

In addition to this, the Ukraine conflict has had a huge effect on crude oil prices. The conflict has impacted the price of Brent Crude Oil, so much so that it has risen from November’s price of around $80 per barrel to $100 plus currently. The steep increase in natural gas, diesel and petrol prices has led to a cascading effect with a rise in the cost of living. Prices for almost everything have shot up. 

A conscious policy change is required to arrest the fuel inflation by the Government of India. The Government can either reduce a few taxes or take definite steps to bring petroleum products under GST, as it is very important to reduce the fuel prices and restrict the inflation from galloping. 

Not bringing Petroleum Products under GST is double whammy for their customers. On one hand, they cannot get credit for VAT paid on Petroleum Products and on the other hand the cost rises for the oil and gas sector companies. For instance, refineries cannot take input GST credit on products/services used for self-consumption for non-GST products.

This discrepancy costs the industry a lot in terms of outflow of taxes. 

Another point which may be considered is a rate rationalisation or GST exemption on the goods and services that are bought for constructing the gas and petroleum pipeline across the country. The high rate of GST on the services of transportation of goods by pipeline owners makes natural gas costlier where input tax credit of GST paid on transportation of natural gas is not available as the output product is not covered/exempted under GST. 

Thus, GST of 5 per cent on services of transportation of goods by pipeline with input tax credit benefit will lead to lower cost of transportation of natural gas and help in promoting cleaner sources of energy for the power and CNG sector. This will also enable natural gas to compete with other alternative fuels like furnace oil, naphtha, etc. 

The operation to lay the pipeline across the country is also significantly impacted by not providing input tax credit on construction of pipeline laid outside factory premises. This results in high construction cost of the pipeline and further increases the gas transportation cost.  The same may be suitably amended to provide input tax credit on pipelines laid outside factory premises.

The inclusion of petroleum products into the GST regime is a long-term solution to make Indian industry more competitive and help tame inflation. As an interim relief, the Government could permit the cross-utilisation of input GST against legacy taxes and vice versa or introduce a refund mechanism. 

(Akhil Mehrotra is the Co-Chairman of ASSOCHAM on Hydrocarbon Council, and the MD & CEO of Pipeline Infrastructure Limited)

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