provided some incentives. These include corporate tax holiday, somewhat mitigated by MAT, infrastructure status which provides for certain financing incentives and customs duty reliefs on capital goods. However, taxes continue to constitute a significant part of the fuel price. High taxes have a cascading and adverse impact on the growth potential of the economy, as it affects affordability. Therefore govt. needs to rework the fiscal framework to ensure the price of potentially significant natural gas. It is not to be loaded with taxes. Govt. should seek benefit from greater tax collection generated due to correspondingly greater economic activity which comes from affordable, rational fuel prices.
In Gujarat the sales tax is 22%. This means tax cost of US$ 0.7 – 1/MMBTU assuming that the regasified LNG is ranging from US$ 3-4/MMBTU. Such a high tax cost is prohibitive, specially as the natural gas anchors around the power sector which is already struggling with low affordability issues, merit order dispatch coupled with the fact that sales tax cost, while it is added into the tariff is not really passed through as in the tax regime, to enable the consumer to take credit for it. The change over to VAT is not expected to bring any relief because States have indicated lack of a credit mechanism for natural gas since electricity is not VAT’able. The VAT on natural gas, which will be imposed on the final cost, will move into the tariff and not be a pass through change available to the consumer of the electricity. Government of India should recognize that fuels are of national importance and significance and classify them as “Declared Goods”, so that state govts. Cannot levy sales tax exceeding 4%
In addition, once VAT is implemented, electricity should be given the status of zero VATed good so that all taxes paid till that day can be clawed back.
Import terminals and pipelines are integral to the development of the energy sector. These are enabling infrastructure. They require equal fiscal treatment as any other infrastructure. Recognition as infrastructure would mean lower customs duty at the import of capital goods for the creation of these facilities. Currently, the effective rate of customs duty on the import of capital goods is 15%. Effectively, reducing the rate of customs duty to a more rational level would mean that the cost of regasified LNG or pipeline tariff will come down.
Giving infrastructure status to import terminals and pipelines would mean lowering of the financing cost for the development of these assets. Investors will enjoy tax-free income from their contribution in the creation of these businesses. Other infrastructures including power sector do enjoy this holiday.
Mr. S.L. Rao added that any tax suggestion must also take a look at what the impact will be on the tax revenues and the alternatives for revenues to be made up. To this Mr. Gokul Chaudhary responded that the import of natural gas, whether by pipelines or by tankers of LNG, will be an addition to the existing