Industry flags GST hike on capital goods, warns of impact on energy independence

New Delhi, Sep 11 (PTI) The recent hike in GST on capital goods used in the oil, gas, and coal bed methane (CBM) sectors has increased operational costs and undermines efforts to reduce import dependence, an industry association said in a letter to Oil Minister Hardeep Singh Puri.

The Federation of Indian Chambers of Commerce and Industry (FICCI) in the September 9 letter to Puri cited the recently approved Oilfields Regulation and Development Act, saying the increase in GST is not aligned with the legislation's objective of providing fiscal stability to upstream exploration and production (E&P) operators.

India imports 88 per cent of its oil needs and roughly half of its gas requirement. To cut down this import dependence, the government has been placing emphasis on raising domestic production.

"An increase in GST on capital goods used for petroleum (including natural gas) and coal bed methane (CBM) sectors from 12 per cent to 18 per cent places an added burden on the petroleum and CBM operations, which require significant risk capital, thereby deterring investments and adversely affecting investor confidence," FICCI said in the letter.

The extraction of gas from below coal seams (CBM) sector has, since inception, been on a revenue sharing mechanism and there is no cost recovery, it said.

"This move (to increase GST) does not support the roadmap of reducing import dependence and will lead to a rise in imports of natural gas for India's committed energy mix of 15 per cent natural gas by 2030," it said.

The additional GST burden is contrary to the various upstream E&P contracts signed between operators and government, which assured of zero custom duties on imports and zero taxes/duties on local purchases under deemed exports.

"The Oilfields Regulation and Development Act aims to provide fiscal stability to upstream E&P operators; however, the increase in GST is not aligned with this objective," FICCI said.

It sought reconsideration of the increase in GST rates and further suggested tax incidence be brought down to nil in line with the E&P contracts to reduce the unnecessary burden on domestic operators.

This, it said, will go a long way in enhancing domestic production of natural gas.

Also, natural gas must be covered under GST to ease the cascading effect of the value chain where natural gas is used as an industrial input, escalating production cost with no input tax credit available.

In a separate letter to Oil Secretary Pankaj Jain, FICCI said the oil and gas sector is already constrained by the absence of input credit on natural gas.

"The GST increase on goods and services further raises costs, discourages investment, and impacts the government's vision of increased natural gas to 15 per cent of energy mix by 2030, besides conflicting with fiscal stability provisions in contracts." PTI ANZ MR MR