Declared Goods status for Natural Gas

June 14, 2007 - PRLog -- “Natural Gas” is the fuel for the future given that it is clean, abundantly available and cost competitive. Projections available from alternative sources on gas consumption points to the fact, that Natural Gas would be the most preferred fuel in the global energy basket by the year 2025. The major factors contributing to this include the increasing globalization of gas business, recent discoveries, inherent fuel efficiencies, opening up of the major gas markets, and projected growth in imports in the Asia – pacific region, Europe and North America and environmental concerns.
Natural gas is an important source of energy in power, fertilizer, petrochemical and other industries. As stated above, the Government policies which are promoting investment in the gas sector by providing sops for LNG, are proof that it recognizes the importance of this sector.
The Report of the Sub-Group on Natural Gas and marking of petroleum products for XI Five Year Plan in its Report stated as under:
•   It is a well known fact that Natural Gas, accounting for 24% of the total global primary energy supply, is the third largest contributor to the global energy basket and with a CAGR of about 3% over the last five years, it is growing at the fastest rate among fossil fuels.
•   In the power sector, only 11% of total power generation capacity of 1,26,839 MW is based on gas whereas in the fertilizer sector, about 58% of production is based on gas. The corresponding figures in the petrochemicals and LPG/Liquid Hydrocarbon Sectors are 43% and 31% respectively.
•   The Sub-Group on Gas Hydrocarbon Vision – 2025 also estimated the long term gas demand. According to this report, as against the requirement of 151MMSCMD in 2001-02, the domestic gas supply was 70MMSCMD. The Report forecast that in future, the demand supply gap would continue to exist, which will have to be met from imports and increase in domestic production.
•   The Ministry of Power had also undertaken an exercise to identify gas based projects likely benefits from which could accrue during the XI plan period and beyond. The estimated capacity for these gas based power plants is of the order of 31765MW. Thus the overall new gas based capacity addition identified for future during XIth / XIIth Plan periods by the Power Sector are of the order of 33,655 MW. The magnitude of gas requirement for all these plants would be of the order of 100-120 MMSCMD, when the plants are set up.
•   Department of fertilizers has proposed the case for switch over to 100% natural gas in the fertilizer sector, which is expected to give a push to gas demand in this sector during the XI Five Year Plan. The projected gas demand in the XIth plan period would increase from 40.82MMSCMD in the year 2007-08 to 79.36 in 2011-12.
•   The estimated demand as per the current industry estimates in the petrochemicals/refineries and internal consumption (of gas industries) sectors is about 25.37MMSCMD in 2005-06. These industries are estimated to grow in line with the economic growth. Hence, an annual growth rate of about 7% is assumed during the XI plan period, which would result in demand of 33.25MMSCMD by the terminal year of the XI Plan.
Natural Gas / RLNG are subject to varying rates of Sales Tax in different States. In few States, the rate is as high as 20%. Besides, the high rate of tax, some States such as Assam, MP also do not allow input tax credit under VAT law to the gas consumers. As electric energy is exempt from VAT, the power generating companies have no choice but to absorb the entire burden as they cannot avail input tax credit. Similarly, goods used as fuel are not eligible for VAT credit due to restriction imposed by the states. This restriction badly affects all sectors that are using Natural Gas as fuel.
Since natural gas is a key input, due to this high and multiple point sales tax structure, the consumers are adversely affected particularly in the fertilizers and power sectors. Importance of natural gas is likely to increase due to increase in production of natural gas in the coming years with interstate trade also increasing consequently. It is important to note that suitable relief in sales tax will not only ensure that cost of gas to the end consumer is kept low but will also facilitate development of National Gas Grid in the country.
As a fuel, natural gas has to compete with coal, which enjoys “declared goods” status under Section 14 of the Central Sales Tax Act 1956 thus attracting maximum 4% sales tax. Also, natural gas and crude belong to the same category – “petroleum”. Thus, when crude enjoys “declared goods” status under CST Act, 1956 natural gas should also be extended the same benefit.

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