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The likelihood of including natural gas under the Goods and Services Tax (GST) gamut augurs well for the gas producing and distributing companies since it will result in lower prices of the fuel thereby making it more competitive with respect to other fuels. Dharmendra Pradhan, Minister of Petroleum and Natural Gas (MoPNG), recently made a strong case for the inclusion of natural gas in the GST regime stating that it is a cleaner fuel than coal, which is already under GST.
The effective tax rate on the compressed natural gas (CNG) and piped natural gas (PNG) in India is 13-40 per cent as a proportion of selling price. The price of CNG includes excise duty of 14 per cent and value-added taxes (VAT) of 5-26 per cent in gas consuming states. For instance, VAT in Delhi is 5 per cent while that in Uttar Pradesh is 26 per cent. It means, GST rate below 18 per cent may reduce selling prices of the CNG and PNG. This would benefit producers including ONGC, and Oil India, and distributors such as GAIL, GSPL, Indraprastha Gas (IGL), Mahanagar Gas (MGL) and Gujrat Gas.
Natural gas consumption during April-October 2017 was up by 4.3 per cent year-on-year to 161 mmscmd (million cubic meters per day) following higher demand from city gas distribution and industrial sector. The demand in October 2017 touched fresh multimonth high of 171 mmscmd. Higher volume visibility of gas consumption may translate into the higher utilisation of the LNG terminals of Petronet LNG, India’s largest regasification company. Also, a shift to gas means higher transmission volume for GAIL and GSPL. The utilisation of the gas for GAIL is 45 per cent and over 75 per cent for GSPL.
The indirect tax collected from sales of natural gas is less than 5 per cent of the total tax levied from the petroleum products. The GST rate is unlikely to be beyond 18 per cent as other alternative fuels currently under the GST regime, such as petcoke and fuel oil, attract 18 per cent GST.
Apart from improved volume, another benefit of the GST regime is that it will eliminate stranded tax, which arises due to the mismatch of tax on the input and output. This may increase the projected earnings per share by 6-8 per cent for the next fiscal for GAIL. ONGC and Oil India may also be able to recover input tax credit on operating expenses linked to natural gas. Natural gas accounts for more than 40 per cent of the domestic production of ONGC and Oil India.
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