LNG Customs duty cut kindles hopes for inclusion in GST

Despite duty cut, LNG will still attract a higher tax than crude oil that has nil custom levy

The government’s push for natural gas-based economy has come in the form of a lowering in the customs duty on liquefied natural gas by half to 2.5 per cent. This coupled with the viability gap funding being provided for the mega Jagdishpur to Haldia and Bokaro to Dhamra pipelines is expected to improve natural gas utilisation in the country, especially in the gas-gtarved regions of eastern India.
 
Despite the cut in duty, however, natural gas that is imported in liquefied form will still attract a higher tax than crude oil that has nil custom levy. “Reducing the duty on LNG is an indication that the government wants to encourage use of cleaner fuels, however, it could have waived the duty altogether. Cutting the import duty by half is not going to make much of a difference in the landed price for consumers unless matched by an increase in duty on polluting fuels,” a Delloite post-budget analysis said.
 
In its attempt to diversify its energy sources, the government wants to increase the share of natural gas in the economy from the current 6.5 per cent to 15 per cent. This shift would, however, be largely be dependent on imports since domestic gas production has stagnated at about 52 million standard cubic metres a day.
 
BC Tripathi, chairman and managing director, GAIL, said a good beginning had been made with the cut. "It is an indication that the government might include it in the goods and service tax. So far, LNG imports for the power sector attracted nil customs duty but with this cut gas utilisation among other consumers will also increase," he said.
 
India imports almost 40-45 per cent of its natural gas requirement, which will go up to 50 per cent in next one year. “By 2020, about 55 per cent will be imported. From 15 million tonnes, imports should go up to 20 mt by 2020,” he said.  For city gas distribution that includes both CNG and piped natural gas, it is estimated that the requirement will increase every year by 1 million tonnes.
 
Around 20,000 MW of power generation capacity is stranded in the country with a number of projects heading to become non-performing assets due to lack of availability of domestic gas. The power and fertiliser sectors which are the main industrial users of natural gas, find it difficult to pass on the higher cost of imported natural gas since they are both subsidised. But lack of adequate domestic production will mean only higher imports.
 
Making a case for higher gas consumption, Tripathi said if natural gas was not imported then more crude oil would be imported. “Oil import today is 80-85 per cent. It is a choice whether you want to bring more oil or more gas. Gas is always cheaper than oil and is environmentally beneficial and easy to transport to the consumer,” he said.
 
Natural gas prices have crashed from $14-15 a million British thermal unit to $7.5-8 but taxation makes it expensive. Prior to the duty cut, about $3 was being loaded on account of taxes and duties. Tripathi said the cut in customs duty would make a marginal 20-25 cents impact on the price.
 
Gas also attracts service tax, inclusive of cess, on transportation besides value-added tax imposed by states. VAT is as high as 25 per cent in Uttar Pradesh. Besides compressed natural gas used in vehicles attracts excise duty. “Excise duty is normally for something new being formed, there is no value addition in CNG by way of manufacturing,” said Tripathi.
 
Natural gas is currently not under the ambit of the goods and service tax which is likely to be introduced in 2017-18. The industry is pitching for it to be included in the GST.
 
Besides price, natural gas consumption is marred by lack of pipeline connectivity. Six fertiliser plants that are under construction will benefitted by the new pipeline connection.

graph