the Petroleum & Natural Gas Regulatory Board (PNGRB) announced a ‘turnover’ tax. The tax is on revenues earned from retailing CNG to automobiles and piped natural gas (PNG) to cities. Is this unexceptionable? It is not. It is a bad tax.
PNGRB was established by the Ministry of Petroleum and Natural Gas (MoPNG) in July 2007 (in accordance with PNGRB Act, 2006). The objective was to protect consumer and producer interests. Producers here mean entities engaged in specified activities relating to petroleum, petroleum products and natural gas in the downstream sector. The Board was also tasked to ensure uninterrupted and adequate supply of these products nationwide through promotion of competitive markets. That means, it was asked to regulate producers in the downstream sector, especially in the matter of seeking undue rent from monopolisation. This is a usual problem in local gas distribution networks and long distance pipeline carriers in the natural gas sector.
This remit, is important to know as we assess PNGRB’s ‘turnover’ tax. Retail gas distributors RIL and GAIL have strongly protested. But that’s not the point. There are both procedural and economic critiques against this decision.
Let’s look at the proposal in detail. As per the Gazette notification, the PNGRB has asked entities to pay Rs 2 crore for turnover of up to Rs 20,000 crore under the head ‘Other Charges’. For turnover of up to Rs 50,000 crore it has levied Rs 2 crore plus 0.008% of revenues in excess of Rs 20,000 crore. For turnover up to Rs 1,00,000 crore it will charge Rs 4.4 crore plus 0.005% of revenues more than Rs 50,000 crore. Besides this, 0.2% of capital expenditure during construction period will be payable. Besides the new tax, PNGRB has also notified fee payable by companies for registration, authorisation and filing complaints.
‘Other charges’ by their very nature are thus essentially a combination of specific and ad-valorem charges and have been levied in conformity with Section 4 of the PNGRB (Levy of Fee and Other Charges) Regulations, 2007. The section states that the entity which is undertaking either operation or construction of any of the activities of registration and/or authorisation under the provisions of the PNGRB Act, 2006 would be required to pay ‘other charges’ to the board annually within 15 days from the date of finalising its annual statement of accounts.
So, the entitlement to levy other charges by PNGRB is.
in concordance with the regulation. But the question is whether such charges can be imposed in the form of a ‘turnover tax’ by a regulator like PNGRB. The turnover tax is usually imposed by the government, and not by a regulator, in order to leave the supplier a profit deemed to be fair, with the rest going in the form of tax. However, if the cost of production exceeds the market price, a negative turnover tax (ie, a subsidy) is usually levied. The tax is usually cumulative in nature and encompasses both production and distribution chains. Thus it has a very high cascading effect and involves multiple taxations of inputs.
There’s another procedural question. ‘Other charges’ are designated for the downstream retailing sector. But do these include just a portion of turnover of retailing CNG and PNG or is the entire turnover the focus. This is especially relevant for an integrated company like RIL, which is involved in both production and distribution of natural gas. If the entire turnover is the focus, the levy has phenomenally negative implications for RIL.
The third procedural question is this: PNGRB is merely a regulator, so to whom will the revenue go and how will it be utilised? The economic critique is the following. ‘Other charges’ in the form of ‘turnover taxes’, because of its implicitly cascading nature, will hurt investments in the city gas distribution pipeline sector; investment spending is included in the base for the charges. The purchase of machines and equipments (together with other inputs) will fall under the levy’s purview. To date, only 19 cities are covered under the city gas distribution network through pipelines. This is a small number. The new levy will come as a big disincentive against further investment. It may also act as a disincentive against the nationwide distribution expansion plan for natural gas. Natural gas is seen as a viable and cleaner alternative to petrol and diesel. Usage of natural gas in India is at its nascent stage. Therefore, PNGRB must analyse the implications of the new tax. Also, it must be noted that PNGRB introduced the tax in a rather non-transparent manner.
Given all this it is hard to think that the tax is compatible with the Board’s remit of ensuring competitiveness and protecting producer and consumer interest. Natural gas is a sunrise sector. It doesn’t need a bad tax.
Source: Financial Express
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PNGRB was established by the Ministry of Petroleum and Natural Gas (MoPNG) in July 2007 (in accordance with PNGRB Act, 2006). The objective was to protect consumer and producer interests. Producers here mean entities engaged in specified activities relating to petroleum, petroleum products and natural gas in the downstream sector. The Board was also tasked to ensure uninterrupted and adequate supply of these products nationwide through promotion of competitive markets. That means, it was asked to regulate producers in the downstream sector, especially in the matter of seeking undue rent from monopolisation. This is a usual problem in local gas distribution networks and long distance pipeline carriers in the natural gas sector.
This remit, is important to know as we assess PNGRB’s ‘turnover’ tax. Retail gas distributors RIL and GAIL have strongly protested. But that’s not the point. There are both procedural and economic critiques against this decision.
Let’s look at the proposal in detail. As per the Gazette notification, the PNGRB has asked entities to pay Rs 2 crore for turnover of up to Rs 20,000 crore under the head ‘Other Charges’. For turnover of up to Rs 50,000 crore it has levied Rs 2 crore plus 0.008% of revenues in excess of Rs 20,000 crore. For turnover up to Rs 1,00,000 crore it will charge Rs 4.4 crore plus 0.005% of revenues more than Rs 50,000 crore. Besides this, 0.2% of capital expenditure during construction period will be payable. Besides the new tax, PNGRB has also notified fee payable by companies for registration, authorisation and filing complaints.
‘Other charges’ by their very nature are thus essentially a combination of specific and ad-valorem charges and have been levied in conformity with Section 4 of the PNGRB (Levy of Fee and Other Charges) Regulations, 2007. The section states that the entity which is undertaking either operation or construction of any of the activities of registration and/or authorisation under the provisions of the PNGRB Act, 2006 would be required to pay ‘other charges’ to the board annually within 15 days from the date of finalising its annual statement of accounts.
So, the entitlement to levy other charges by PNGRB is.
in concordance with the regulation. But the question is whether such charges can be imposed in the form of a ‘turnover tax’ by a regulator like PNGRB. The turnover tax is usually imposed by the government, and not by a regulator, in order to leave the supplier a profit deemed to be fair, with the rest going in the form of tax. However, if the cost of production exceeds the market price, a negative turnover tax (ie, a subsidy) is usually levied. The tax is usually cumulative in nature and encompasses both production and distribution chains. Thus it has a very high cascading effect and involves multiple taxations of inputs.
There’s another procedural question. ‘Other charges’ are designated for the downstream retailing sector. But do these include just a portion of turnover of retailing CNG and PNG or is the entire turnover the focus. This is especially relevant for an integrated company like RIL, which is involved in both production and distribution of natural gas. If the entire turnover is the focus, the levy has phenomenally negative implications for RIL.
The third procedural question is this: PNGRB is merely a regulator, so to whom will the revenue go and how will it be utilised? The economic critique is the following. ‘Other charges’ in the form of ‘turnover taxes’, because of its implicitly cascading nature, will hurt investments in the city gas distribution pipeline sector; investment spending is included in the base for the charges. The purchase of machines and equipments (together with other inputs) will fall under the levy’s purview. To date, only 19 cities are covered under the city gas distribution network through pipelines. This is a small number. The new levy will come as a big disincentive against further investment. It may also act as a disincentive against the nationwide distribution expansion plan for natural gas. Natural gas is seen as a viable and cleaner alternative to petrol and diesel. Usage of natural gas in India is at its nascent stage. Therefore, PNGRB must analyse the implications of the new tax. Also, it must be noted that PNGRB introduced the tax in a rather non-transparent manner.
Given all this it is hard to think that the tax is compatible with the Board’s remit of ensuring competitiveness and protecting producer and consumer interest. Natural gas is a sunrise sector. It doesn’t need a bad tax.
Source: Financial Express
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