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VAT could have 4% cap
April, 15th 2010

The proposed price pooling for natural gasa way of leveling the consumer price of gas without affecting the interests of different producersmay be accompanied by major changes in the way natural gas is taxed in the country. The petroleum ministry is looking at a proposal to cap the state-level value added tax (VAT) on natural gas at 4% as well as to simplify the tax regime that applies to gas produced from various fields.

The ministry wants price pooling for the clean fuel as the demand from the power and fertiliser units is likely to go up forcing them to rely more on imported gas, which becomes costlier when crude prices move up. The comprehensive proposal before the ministry also involves tax changes.

Since it is the stated objective of government to provide gas as a clean source of energy across the country, according gas the status of Declared Goods would merit consideration, the experts appointed by state-owned gas distributor GAIL recommended in its report.

Through the Central Sales Tax Act, the Centre has restricted state governments power to tax certain goods of special importance in inter-state trade. Now the ceiling prescribed is 4% for these products that also include crude oil and coal, but not natural gas. States now levy different rates of VAT on gas.

Besides, certain states do not allow input tax credit to gas consumers like power producers.

Price pooling of gas involves aggregating gas from various producers by an operator, say Gail, and allocating it to different consumers at a uniform price on an arms length basis as per the governments gas utilisation policy. The study on price pooling commissioned by Gail also recommends simplifying the taxation regime for natural gas produced from various fields under different contracts.

Since gas produced from various fields at different prices are aggregated and the consumer gets a uniform price irrespective of the source, taxes on gas produced from different fields needs some rationalisation. The petroleum ministry has asked for public comments on the issue.

Gas being the feedstock for fertiliser and petrochemical makers and fuel for power plants, the government wants to make it available for these consumers at a stable price so that they could confidently make major investments in expansion.

That would address the growing energy needs of the economy as well as reduce the dependence on other fuel, which are subsidized, thereby reducing the burden on government finances.

Gails consultants-Mercados Energy India-recommended price pooling for only the power and fertilizer sectors, which consume about two thirds of the 132-million standard cubic metre a day natural gas produced in the country now.

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