JUNE 07, 2017

By Rakesh Kumar, Retd. Member (T), CESTAT

IN my earlier article titled "Post GST Taxation of Motor Spirit" dated 17.04.17, it had been pointed out that –

(a) while to begin with, five petroleum products, namely, "Petroleum Crude", "High Speed Diesel (HSD)" , "Motor Spirit (Commonly known as Petrol)", "Natural Gas" and "Aviation Turbine Fuel(ATF)" , would be outside the purview of GST, and for this purpose Entry 84 of the List I and Entry 54 of the List II of the 7th Schedule of the Constitution still covers these five petroleum products and accordingly these five petroleum products would be subject to levy of Central Excise duty by the Central Government and Sales Tax by the State Governments, in the Taxation Laws Amendment Bill, 2017, which seeks to amend the Central Excise Act ,1944 so to restrict the levy of central excise duty only to the Tobacco and Tobacco products and the five petroleum products mentioned above, the Central Excise duty is sought to be levied on all types of motor spirits - three types of Special Boiling Point spirits (SBPS), covered by sub-headings 2710 1211, 2710 1212 and 2710 1213 and Other Motor Spirits of sub-heading 2710 1219, and also on "Natural Gasoline Liquid" of sub-heading 2710 1212, and "other light oils and preparations" of sub-heading 2710 1290 – which are not even motor spirits;

(b) Motor Spirit(commonly known as Petrol) or in other words, Petrol, is different from SBPS of sub-heading 2710 1211 to 2710 1213, as while the SBPS ,as per its definition in the sub heading notes of Chapter 27 of the newly-introduced Fourth Schedule to the Central Excise Act, 1944 do not contain any anti-knocking preparations, Petrol, in order to conform to the Indian standard IS 2796 : 2000 contains anti-knocking substances and other additives; and

(c) It is absolutely wrong to subject all varieties of motor spirits and also Natural Gasoline Liquid and other light oils and preparations, which are not even Motor Spirits, to Central Excise Duty, as Entry 84 of the List I of the 7th Schedule of the Constitution covers only one variety of the Motor Spirit which is commonly known as Petrol.

2.The Taxation Laws Amendment Bill,2017 having been passed by both Houses of the Parliament without any change and having received the assent of the President of India has now become an Act. Heading 2710 of the newly introduced Fourth Schedule to the Central Excise Act, 1944, mentioning rate of excise duty on the Petroleum products of this heading,which are subject to Central Excise duty, is reproduced below:

From the above, it will be seen that as against the constitutional mandate for levying central excise duty only on one variety of Motor Spirit, i.e. Petrol, the Central Excise Act,1944, as amended by the Taxation Laws Amendment Act, 2017, levies excise duty on all the products covered by sub heading 2710 12, that is, on all the "Light oils and preparations".

3. The GST Council has now finalized the GST rates for almost all the goods and services.The "GST rate schedule for goods", finalized by the GST Council, in respect of the petroleum products of heading 2710 of Chapter 27 of the HSN, prescribes –

(a)5% GST rate for Kerosene PDS;

(b)28% GST rate for Av gas i.e. Aviation Gasoline; and

(c) 18% GST Rate for the following products of the heading 2710-

"Petroleum oils and oils obtained from bituminous minerals, other than crude; preparations not elsewhere specified or included , containing by weight 70% or more of petroleum oils or of oils obtained from bituminous minerals , these oils being the basic constituents of the preparations; waste oils;[ other than Av gas and Kerosene PDS ], such as Superior Kerosene Oil(SKO), Fuel Oil , Base Oil , Jute batching oil and textile oil, Lubricating Oil, Waste Oil [Other than petrol , diesel and ATF not in GST]."

Thus in the GST Rate schedule for goods finalized by the GST Council, the petroleum products of heading 2710 mentioned under 18% GST rate exclude only the "petrol , diesel and ATF, not in GST"from the levy of GST and thereby implying that all other products of the heading 2710, except for Kerosene PDS covered under 5% GST rate and Av Gas covered under 28% GST rate, would attract 18% GST. This is so, as, because of use of the term ‘such as', the list of the petroleum products mentioned after this term cannot be treated as exhaustive list of all the products covered by the general expression preceding this term. Therefore, unless the Fourth Schedule to the Central Excise Act, 1944, introduced by the Taxation Laws Amendment Act, 2017 is amended so as to confine the excise levy only to the five petroleum products mentioned in the entry 84 of the List I of the 7th Schedule of the Constitution, except for "petrol",all other petroleum products of the sub heading 271012 covering ‘Light Oils and Preparations', would attract central excise duty as well as GST.

4. However, there are two serious mistakes in the GST rate schedule for goods also.

4.1. The first mistake is that the GST rate schedule excludes "Diesel", not the "High Speed Diesel (HSD)" from the levy of GST. The diesel oil is of two types – the "Light Diesel Oil(LDO)" of sub-heading 2710 1940 and "HSD" of sub heading 2710 1930. While HSD is used in the engines with rpm above 750,like the engines in cars, buses, trucks, locomotives, etc, LDO is used in engines with rpm below 750, like those used in lift irrigation pumps, DG sets, ships, etc. LDO is also used in furnaces. What is excluded from the purview of GST is HSD, not all types of diesel. In heading 2710 of Chapter 27 of the Fourth Schedule to the Central Excise Act 1944, no rate of duty is specified for LDO of subheading 2710 1940. Therefore, if the GST rate schedule is notified as such, there would neither be GST nor excise duty on LDO.

4.2. The second mistake in the GST rate schedule is that while prescribing 18% GST rate for petroleum products of heading 2711, namely – " Petroleum gases and other gaseous hydrocarbons, such as Propane, Butane, Ethylene, Propylene, Butylene and Butadiene [other than liquefied propane and butane mixture, liquefied propane, liquefied butane and liquefied petroleum gases (LPG) for supply to household domestic consumers or to non-domestic exempted category (NDEC) customers by IOCL, HPCL or BPCL]", there is no exclusion of "natural gas" which is outside the GST. If this rate schedule is notified as such by the Central Government, it would result in levy of central excise duty as well as GST on the natural gas.

4.3. The above mistakes in the "GST Rate Schedule for Goods" must be rectified before the same is notified by the Central Government and the State Governments.

5. Another problem in the post-GST taxation of petroleum products is regarding input tax credit. The major final products of the refineries are petrol, HSD and ATF which are outside the GST, and on which the central excise duty and the state sales tax would continue to be levied. The definition of ‘exempted supply' as given in Sec 2(47) of the CGST Act includes the supplies on which there is no GST. In terms of Section 17(2) of the CGST Act, when common goods or services or both are used partly for making taxable supplies including zero rated supplies and partly for making exempted supplies, the input tax credit would be restricted only to so much of the input tax which is attributable to the taxable and zero rated supplies. Since an oil refinery uses capital goods and a large number of inputs and input services which would have suffered GST, the proportionate input tax credit would not be admissible in respect of the outward supplies of the main final products of the refinery – petrol, ATF, and HSD,which being outside the GST , would be ‘ exempted supplies'. This will result in cascading of the input taxes and will increase the tax burden in respect of these petroleum products.The only way to avoid negative impact of GST on these petroleum products would be downward revision of the rate of excise duty on them by taking into account the non availability of the input tax credit and its cascading effect.

(The views expressed are strictly personal.)