Budget 2024: Paving the way for a unified landscape in the oil and gas sector

The Union Budget 2024 is on the anvil and expectations are mounting for various tax proposals across sectors. The oil and gas sector also has an extensive wish list, demanding policy initiatives and reforms to boost domestic oil production and exploration, encourage green hydrogen projects, measures to increase gas consumption and adopt alternative fuels.

A key concern of the sector has been the inclusion of petroleum and natural gas in the GST framework. It is worth mentioning that while enacting the Constitution 101st Amendment Act, 2016, petroleum products were deliberately included in the ambit of the GST legislation (unlike alcoholic beverages for human consumption) but the tax was deferred. Therefore, while the tax on such products can be levied only on the recommendation of the GST Council, the announcement in the Budget of the government’s intention to implement this objective soon will certainly be a step forward in this direction.

A GST-based tax regime for the oil and gas sector is necessary to mitigate the negative economic impact faced by producers due to exorbitant taxes and input costs due to rising global crude oil prices. Moreover, variable VAT rates levied by various states on these products, replaced by a uniform GST rate, will help address the issue of fuel price disparity across the country. Needless to say, the smooth flow of input tax credit will lead to significant cost savings and unlock supply chain efficiencies, thereby encouraging greater investment opportunities in the sector.

The inclusion of natural gas in GST will be in line with the government’s strategic objective of achieving net zero emissions by 2070 and increasing the share of gas in the overall energy mix. The government’s mandate to implement phased mandatory blending of Compressed Biogas (CBG) with CNG and PNG is a key step towards transitioning to a gas-based economy and moving towards green energy. To further boost growth, the industry is expecting fiscal incentives to encourage setting up more CBG plants, directives for pipeline connection to CBG plants to enable greater production and offtake of CBG, along with increased support for biogas R&D.

Navigating the complex political landscape is the biggest challenge in achieving the goal of a uniform tax landscape for the oil and gas sector. Given that VAT/sales tax levied by states on petrol, diesel and natural gas is a major source of revenue, reaching a consensus between the Centre and the states will be a mammoth feat. In a PIL filed before the Kerala High Court, the Court directed the Union Government and the GST Council to show cause as to why the said products are not covered by the ambit of GST. However, the 45th meeting of the GST Council witnessed vehement opposition from several states to the proposal, leading to yet another impasse.

Concerns about revenue loss to states may require a compensation mechanism, and the Centre is unlikely to go down that route. Besides, fixing the GST rate will be another challenge, given the existing revenue share of the Centre and states from excise duty and VAT. Any anomaly in the GST rate structure could lead to price volatility, which in turn could fuel political resistance and opposition, defeating the very purpose that such a reform was supposed to achieve.

While the industry remains hopeful and geared up for the inclusion of oil and gas under GST, the question remains whether the Budget will deliver the much-awaited breakthrough on this front or will be another failed venture.

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This article was co-authored by Anshul Mathur, Executive Partner and Ishita Goyal, Senior Associate, Lakshmikumaran & Sridharan Attorneys

Reservation:The views expressed in this article are the author’s own and do not reflect the position of this publication.

This article was co-authored by Anshul Mathur, Executive Partner and Ishita Goyal, Senior Associate, Lakshmikumaran & Sridharan Attorneys

Reservation:The views expressed in this article are the author’s own and do not reflect the position of this publication.