Govt may hike excise on petrol, diesel

NEW DELHI: The government is set to rejig the entire duty structure for the petroleum sector in Budget ’05-06.

While customs duty is expected to be reduced on crude, domestic LPG and kerosene, excise duties are likely to be increased on major industrial petroleum products including LSHS (low sulphur high stock), naphtha and fuel oil, among others.

Excise levies on auto fuels (petrol and diesel) are also likely to be increased marginally.

The increased excise levies will help government mop up additional funds, which will neutralise the revenue loss suffered on account of the duty cut on crude. Excise duties on LPG and kerosene may, however, be reduced in a bid to reduce the subsidy burden.

The finance minister has said there is no point in levying duties on products that are subsidised.

The proposed duty structure will bring some cheer to integrated oil companies such as IOC, HPCL and BPCL, who will now have a lower subsidy burden. Refining companies like Reliance, Numaligarh Refineries, Chennai Petroleum, Kochi Petroleum and Mangalore Refineries will have to do with reduced margins as the changed duty structure will effectively reduce the protection levels for domestic refineries.

Protection levels for domestic oil companies depend upon the difference in customs duty rates between crude (raw material) and petroleum products (finished products).

The changes in the duty structure are being considered following high-level deliberations at the PMO with petroleum and finance ministry officials. The changes are being sought in view of the high global prices, which are likely to remain firm in the coming days, and a need to reduce the subsidy burden on oil marketing companies.

The likely changes in the duty structure will attempt to reduce the losses suffered by oil marketing companies on the sale of the subsidised products — LPG and kerosene.

As of now, while oil marketing companies buy these products at import parity prices (inclusive of customs duties) from refineries, they are forced to sell it at artificially lowered prices on government directives.

For instance, IOC ends up selling every cylinder of cooking gas at a loss of Rs 103 at the retail level. Since retail prices of these fuels, particularly kerosene, are unlikely to be increased, a lower cost price (following customs duty cuts) will improve the margins for oil marketing companies and reduce the total subsidy burden.

The total subsidy loss, which has been absorbed by oil companies in FY05, is a whopping Rs 18,000 crore.

The increase in excise levies on some products is being proposed so as to make the whole exercise revenue neutral. The drop in customs duty on crude will lead to reduced revenues for the Centre — a measure the government can ill afford.

It is being proposed that the changes in the excise levies, through higher rates and a mix of specific and ad valorem levies, will ensure a steady flow of revenues from the oil sector.

The combination of specific and ad valorem in the excise duty structure will aid the twin objectives of maintaining a buoyancy in revenue collections if prices increase, and protecting consumers from the volatility of global prices.