Petroleum to be kept out of GST

After failing to convince states to keep petroleum products within the ambit of the proposed goods and services tax (GST), the Centre has finally relented. It has agreed to the proposal of the empowered committee of state finance ministers to keep petroleum products like crude, motor spirit, aviation turbine fuel (ATF) and high-speed diesel out of GST.

The Union government, however, is not ready to budge on the treatment of natural gas in GST. The empowered committee had not taken a final view on natural gas in its discussion paper released last year. Now, the government wants natural gas within GST, but the states are not willing to do so.

"Even though we saw merit in keeping petroleum products in GST, we have agreed to the demand of the states to keep it out. But we strongly feel natural gas should be within GST. The matter is yet to be resolved," said a senior finance ministry official, who did not wish to be identified.

Another top official in the ministry confirmed that petroleum would be outside the purview of GST, as is the existing practice in the country. States will continue to levy sales tax on petroleum products with the prevailing floor rate. Similarly, the Centre will also continue its levies.

"It will be important to see how petroleum and diesel products are defined… If the government is levying service tax on aviation, there is no reason why ATF is kept out of the tax net," said Pratik Jain, executive director, KPMG. He added keeping the petroleum products out of GST would allow both the Union and state governments to increase or decrease the taxes as and when they want.

The Centre had opposed keeping crude petroleum and natural gas out of the GST net as it would imply that the credit on capital goods and input services going into exploration and extraction would not be available, resulting in cascading. Diesel, ATF and motor spirit are derived from a common input, crude petroleum, along with other refined products such as naphtha and lubricating oil base stock.

"Leaving diesel, ATF and motor spirit out of the purview of GST would make it extremely difficult for refineries to apportion the credit on capital goods, input services and inputs. These products are principal inputs for many services such as aviation, road transport, railways and cab operators, among others. As such, these may be levied to GST, and in select cases, credit of GST paid on these items may be disallowed in order to minimise the possibility of misuse," the Centre had said in its response to the discussion paper.