Despite a subpar election performance, the Narendra Modi-led National Democratic Alliance (NDA) government might still be able to bring the gas sector under the Goods and Services Tax (GST) regime, according to a note from Citi Research. The US brokerage maintains a positive outlook on the gas sector, with GAIL (India) and Mahanagar Gas Limited (MGL) as its top picks in the energy sector.
Today, GAIL shares surged by 8%, reaching a high of Rs 210.85, while MGL shares rose by 5%, bolstering the Nifty Oil & Gas index. By 12:30 pm, the 15-stock index was up by 2.5%, with all components trading positively.
Citi’s optimism stems from the NDA government still having the necessary majority in the GST Council. The note highlighted that a key development in the Modi 3.0 government could be the inclusion of the gas sector within the GST framework. Although this move is relatively less contentious, the NDA’s push for this reform could benefit the entire gas value chain.
The current administration has been focusing on increasing the use of gas in the economy. Although the timeline is uncertain, Citi identifies multiple benefits from this reform. One major advantage is the reduction of tax inefficiencies along the gas value chain, as gas currently faces various input and output taxes leading to a tax cascade. It would also harmonize tax differences between states. For example, gas/LNG purchased in Gujarat and sold in other states incurs a 15% input tax. Meanwhile, VAT on CNG is zero in Delhi but ranges from 3-5% in Maharashtra, Gujarat, and Uttar Pradesh, the report noted.
Incorporating the gas sector into this indirect tax regime would allow entities like GAIL, city gas distributors (CGDs), and industrial gas consumers to claim input tax credits on their gas purchases, which are currently stranded under the VAT system.
Benefits for consumers could include a reduction in CNG prices, depending on the GST rate set, as CNG currently incurs a 14% excise duty, the report mentioned.