Union Budget 2021: Oil and gas industry seeks roadmap of govt’s vision to integrate it into GST regime

In the wake of financial turmoil on account of COVID-19 , the oil and gas industry is looking at Budget 2021 with great expectations to provide a fiscal stimulus and remove tax inconsistencies and administrative hurdles.

The oil and gas industry is saddled with an increased tax cost on account of its non-inclusion under Goods and Service Tax (GST) regime. While the sector pays taxes on key products under legacy tax regime (i.e. excise, value-added tax, state taxes, etc.) its input consists mostly of items which are under the current GST regime. GST paid on such inputs is not available as the credit against output legacy taxes and hence becomes a cost to the industry. It is expected that the government may resolve such anomalies by providing a roadmap of its vision on how it proposes to integrate the sector into the GST regime.

Inclusion of petroleum products under the GST regime would be pivotal in reviving the industry sentiments. If this plausible and persistent ask is not honoured directly, at least cross utilisation of input GST against excise duty/ sales tax should be allowed for interim relief to avoid inflationary effect on the economy. The government may also consider the reduction of excise duty/VAT considering the high price of crude. Further, it would be in the interest of the sector if the clarity is brought on various GST issues in the exploration and production (E&P) sector.

The year 2020 has also highlighted the dire need to consider the use of climate-friendly resources. To promote this change, GST on import freight for all LNG cargoes should be withdrawn. The government may also consider exemption or rate rationalisation (5 percent) of goods and services procured for construction of cross-country petroleum and gas pipeline under the GST regime as they attract GST up to 28 percent. Absence of availability of input tax credit and high rates of GST increase the cost of operation substantially.

Apart from giving fillip from the indirect tax front, the government may also consider giving direct tax exemptions or concessions to make the investment in the sector attractive for domestic and foreign investors. This could be achieved by extending the concessional direct tax rate, as applicable to manufacturing companies, to companies in the Exploration and Production (E&P) sector and City Gas Distribution business. This will reduce the base tax rate of such companies to 15 percent as against current tax regime of 22 percent.

As an alternative, the government may also consider bringing back tax holidays or weighted deductions for capital expenditure incurred by these companies. This will achieve twin objectives of providing better tax regime to domestic and foreign investors to encourage their participation in the future bid rounds and promotion of domestic production and encourage gas-based economy.

It would also help if the government provides clarifications on the legacy direct tax controversies on the eligibility of tax holidays, availability of presumptive tax regime and other related controversies. This will ensure that the tax controversies are put at rest and would save valuable time and resources of such companies and the government.

Apart from aforesaid substantive changes, the government may also consider giving administrative reliefs to the companies engaged in the sector. For instance, the fast-tracking approval process for environmental and forest clearances, removing restrictions on Exploration and Production companies to table their contracts before both the Houses of Parliament, removal of the requirement for obtaining Essentiality Certificates for domestic movement of goods, removal of GST registration requirement for offshore blocks, etc.

It has been noticed that the companies incur avoidable additional cost and administrative burden, which can be easily saved through administrative action.

In a nutshell, the oil and gas industry is looking at the government to provide much-needed relief for the sector which is saddled with a high tax cost and administrative burden.

The writer is Tax Partner, EY India.