Arun Jaitley urges states to cut VAT on hydrocarbons

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New Delhi: In a move to give relief to the manufacturing sector from the higher tax outgo on account of five hydrocarbons being kept out of the ambit of the goods and services tax (GST), finance minister Arun Jaitley has urged states to lower the value-added tax (VAT) on these items.

Crude oil, petrol, diesel, natural gas and jet fuel have been kept out of GST as a compromise between the Union and state governments to get the latter’s support for the new indirect tax. Tax on petroleum, which is easy to collect, roughly accounts for about 30% of state tax revenues.

Jaitley has written to chief ministers urging them to reduce the VAT on petroleum products used as inputs in the production of goods, according to an official statement from the finance ministry. The finance minister’s letter highlights concerns raised by manufacturers about a rise in input costs of petroleum products following the rollout of GST on 1 July.

Under the new indirect tax regime, manufactured goods attract GST while the inputs of petroleum products used in the process attract VAT, leading to a situation of tax being levied on tax. Credits for taxes paid on raw materials under one tax system cannot be used for adjusting the final tax liability under another system.

“In the pre-GST regime, certain states had lower rate of 5% VAT on compressed natural gas (CNG) used for manufacturing goods. Some states also had lower rate of VAT on diesel being used in manufacturing sector,” said the ministry statement, adding that Jaitley requested other states to also lower the rate of VAT on petroleum products used in production. The idea is to minimize any disruption in the costing of goods.

Natural gas is used in manufacturing fertilizers, petrochemicals and a variety of products such as glass, and an increase in their cost could impact inflation. Besides auto fuels such as petrol and diesel, crude oil refining also yields naphtha, a liquid hydrocarbon that is the building block of many petrochemicals used in different industries.

These manufacturers have been asking for a scheme to get refund of the tax credits that they are not able to use in the GST regime. An official of the GST Council, the federal indirect tax body, who spoke on condition of anonymity said that it was not considering any such proposal.

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