Union Budget 2020 expectation: Removal of GST on Royalty payments to government, Vilas S Tawde, Essar Oil and Gas Exploration and Production

Team OD Updated: January 29, 2020, 11:21 PM IST

The upcoming Union Budget 2020 is being seen as one of the most important events for the Indian automobile fraternity who has huge expectations from it. It will be presented by finance Minister, Nirmala Sitharaman on February 1, 2020 making it the second budget for the Narendra Modi-led government. What makes it an important one is the fact that the Indian economy that has already been facing a low phase with the low 2019-20 GDP growth of five per cent which is the lowest in 11 years. Considering the huge contribution of the automobile sector in the Indian economy, corrective measures to improve the state of affairs are being expected in FY 2021. The industry slowdown continues to dampen the sales and demand in the country. Several players in the industry have started voicing out their expectations from the Union Budget 2020, which includes updates in the GST tax rates, reducing custom duties in certain parts and also incentives in exports, all of which would bring some respite to the industry. Here is a quote from Vilas S Tawde, Managing Director and CEO, Essar Oil & Gas Exploration and Production Ltd.

Vilas S Tawde, Managing Director and CEO, Essar Oil & Gas Exploration and Production Ltd

Removal of GST on Royalty payments to government – Royalty on minerals or mineral oil is a statutory levy under various Central or State legislations at rates specified on quantity of mineral or mineral oils quarried, mined, recovered, excavated or collected. The royalty payable is value of product extracted from the natural resource which belongs to the Government itself and Operator sells it only as a trustee or an agent of the government. In absence of any specific provision under Service Tax Act, 1994 and under Goods and Service Tax Act, 2017, there is an ambiguity as to "whether royalty payments are consideration for services provided by the Government?" This ambiguity leads to dispute between department and assessee.

Further, it may be noted that of the four factors payments viz. rent for land, wages for labour, interest for capital and dividend for entrepreneur, only royalty is being subjected to Service tax/GST while all others are outside the purview of service tax/GST. In case of royalty, as per Oilfield Development and Regulation Act 1948 read with PNG Rules 1959 as amended from time to time, royalty or dead rent, whichever is higher is payable. Thus royalty is akin to rent and should also be under Service Tax/GST. Therefore, our recommendation is to come up with a specific provision or clarification on non-applicability of Service Tax or GST on Royalty payments to Government as royalties are in the nature of compulsory payments and not in the nature of any consideration for service performed or to be performed by the Government. Royalty payments should not be required on payment of Royalty to avoid payment of dual tax.

Implementation of GST under E&P business – Sale of Crude Oil and Natural Gas is outside GST regime but procurement of Goods and services for its production are subject to GST regime. Thus, the Tax Credit of GST paid on inputs are not allowed against the output VAT making the industry burdened with huge indirect tax. This has resulted in a significant increase in the exploration and development costs. We would recommend to bring in petroleum and petroleum products within the purview of GST at the earliest to ensure smooth flow of credit and avoid any stranded taxes for the competitiveness of this critical sector. At the least Gas should be brought under GST.

Removal of Service tax on E&P JVs – The Operator in a joint venture (JV) needs to raise invoice on other partner in the JV and accordingly charge Service Tax on the Manpower Services on the JV partner's share of Participating Interest. However, the sale of petroleum is not covered under GST. This creates a credit loss for the partners of the JV and an indirect tax burden on the JV partner.

Thus, we recommend to exile the service tax on such incidences until the E&P business is included in the purview of GST so that there is proper cascading of tax credits."