India's green vision to see full duty exemption on LNG

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New Delhi:  In a bid to promote a gas-based economy, the new Government may cut customs duty on liquefied natural gas (LNG) to zero per cent from 2.5 per cent, to cut the cost of power further and aid city gas distribution (CGD) projects besides boosting fertiliser production, according to official sources.

Petroleum Ministry officials said they are hopeful that this cut would be included in the Union Budget 2019-20 proposals to be presented in Parliament this July. The matter has already been discussed with the Finance Ministry.

LNG is a clean fuel and its imports currently attract 2.5 per cent basic customs duty. In addition, a social welfare surcharge of 10 per cent is levied that takes the effective customs duty on LNG to 2.75 per cent. This adds up to the cost of imported gas as LNG requires additional cost for reconversion into gas and transportation.

The Union Budget 2017-18 halved duty on LNG from 5 per cent.

The industry and the Petroleum Ministry have been pitching for exempting LNG from import duty for some time now as there is a shortage in domestic production.

The Centre has exempted domestic power generators using gas as fuel to import LNG without payment of any duty. It has, however, kept a vast section of user industries such as fertiliser, LPG, CNG, PNG and petrochemical out of this duty relief. This is likely to be corrected this year to provide a level playing field to all gas users in the country, said sources.

"With domestic production of gas still unable to meet the demand, there is urgent need to allow duty-free access to LNG without end-use restrictions to allow all sectors to access this clean fuel," said a government official not willing to be named.

Cheaper access to LNG is expected to keep power tariff low while also allowing the government to save on fertiliser subsidy as the cost of production will reduce.

Spot rates of LNG are down at this juncture due to subdued global demand. The rates have fallen sharply since the beginning of this year with LNG prices coming down to $6 per million metric British thermal units (mmBtu). With customs exemption, the situation would provide a bonanza to user industries and accelerate the adoption of cleaner fuel.

With stagnant domestic production, the demand for imported LNG is on the rise. In 2018-19, the availability of domestic gas for sale rose merely 0.4 per cent while the import of LNG went up 2.6 per cent. The share of LNG in total gas consumption in the year was 51 per cent.

India, the world's fourth-biggest importer of LNG, does not have a free market regime for gas. Natural gas is sold on the basis of a government-mandated formula that links the local price to international rates, while most long-term import contracts are linked to crude oil. The country has, however, liberalised gas production regulations for new fields as well as deep sea and difficult blocks.