Uniform tax rate: Centre wants states to cap VAT on CNG at under 5%

Uniform tax rate: Centre wants states to cap VAT on CNG at under 5%

The Centre wants the states to limit the value-added tax (VAT) rates on compressed natural gas and liquefied natural gas (CNG/LNG) at under 5%. The Centre has also pitched for lowering of road taxes for vehicles running on CNG/LNG by states to make these on par with the rates charged on electric vehicles (EVs). These proposals are part of the draft policy for city gas distribution (CGD) prepared by the Ministry of Petroleum and Natural Gas (MoPNG) which, the government expects will become a template for every state to come up with their own CGD policies. Different states charge different VAT on CNG. For example, while Delhi completely exempts VAT on CNG, the same in Uttar Pradesh, Maharashtra and Gujarat is as high as 12.5%, 13.5% and 15%, respectively. It remains to be seen if the states agree to reduce the VAT on CNG as suggested by the MoPNG, and forego the income they earn from this source.

According to experts, having a uniform tax rate for CNG will address the long-standing demand of including gas under the ambit of the GST. “Rationalising the VAT rates and bringing them to a uniform level will help take up this much delayed reform,” Deepak Mahurkar, partner, PwC, told FE.

According to the draft policy reviewed by FE, states are expected to form a committee under the chairmanship of their respective chief secretaries which will meet at least once in three months to assess the development of the CGD network in the states. The committee is expected to coordinate with various local and civic bodies to streamline the process of procuring various clearances and standardise levies and charges. The Centre has suggested that state-level committees should also put a policy thrust to promote CNG and LNG as the preferred fuel in public transportation.

The main challenge the expansion of the CGD network faces is obtaining licences and work permits from a plethora of civic agencies including the land owning agency, the municipal corporation, district magistrate and the fire department.

The draft policy proposes states to create a single-window clearance mechanism for getting all the clearances.
At present, the coverage of the CGD network spans across 232 geographical areas spread over 407 districts in 27 states. The present share of gas in the energy basket of the country is 6.2%, and the target is to take it to 15% by 2030. As on September 2019, there were 1,815 CNG stations and 54.2 lakh domestic connections across the country.

Currently, about 76% of the CNG stations and 80-90% of the PNG connections are concentrated in Delhi, Gujarat and Maharashtra.

Under the ninth and 10th rounds of bidding for CGD networks, the number of CNG stations and domestic piped natural gas (PNG) connections are expected to increase by 8,181 and 4.2 crore in next 8-10 years.

The draft policy comes at a time when CGD network operators are seen to benefit from a sustained weakness in global spot LNG prices and an expected decline in domestic gas price. According to Kotak Institutional Equities, CGD companies source around 15% of their domestic gas requirement from the Panna-Mukta-Tapti (PMT) fields.

After the expiry of PMT’s production sharing contract in December 2019, gas from this field is seen to the levels of $3.6 per million british thermal units (mbtu), against its earlier contracted price of $5.7/mbtu.

Kotak expects domestic gas price to decline by around $1/mbtu in the upcoming revision for the first half of FY21. Apart from state-run GAIL Gas, Gujarat GasIndraprastha GasMahanagar Gas, Indian Oil, Hindustan Petroleum and private entities such as Adani Gas and Torrent Gas have significant presence in the sector.

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