Oil's in for a spillover

Budget ’03-04 is expected to bring in some major fiscal changes for the petroleum industry. Introduction of specific excise duties, a long-standing demand of the petroleum ministry, reduction in customs duty rates for crude and petroleum products and waiver of duties on capital goods for refinery expansions and new grassroot refinery projects are prominent among the issues facing the industry.
The forthcoming Budget is also likely to see a reduction in subsidies on kerosene and LPG. The government announced last year that the subsidies on these two products would be gradually reduced and finally removed in the next two-three years.
It has been estimated that the LPG subsidies may be reduced by Rs 20 a cylinder and by about Re one a litre of kerosene. The task force’s report on indirect taxes headed by Dr Vijay Kelkar has reinforced some of the petroleum industry’s demands on the excise front, although on the customs front, the petroleum ministry and the industry hold different views.
The petroleum ministry, which is of the opinion that domestic refining companies need extra protection, have argued that there should be at least a 10% a difference between the duties on crude and oil products.
As of now, the duty on crude is 10%, while that on petroleum products like petrol and diesel is 20%. The Kelkar committee had, however recommended these to be scaled down to 8% for crude and 15% for the oil products, in the first phase.
The petroleum industry and the ministry feel that this would reduce their effective rate of protection. However, Mr Kelkar argues that the domestic refineries enjoy a rate of protection over 80%.
Early indications suggest that customs duty may be scaled down to 8% on crude and 15% on petro-products. The petroleum ministry has also urged the finance ministry to maintain all subsidised products — LPG, Kerosene and naphtha, LSHS and FO —at the same rate as that of crude to maintain the effective rate of protection for the domestic refineries.
The petroleum ministry has also asked for an extension on the duty waiver on all project imports for expansion of refineries and grassroot refineries. This is important in light of the fact that most of the refining companies are going in for expansion of their existing capacities.
A duty waiver on this front will allow these companies to go ahead with their expansion plans.
On the specific duty front, the finance ministry is convinced of the need to do away with the three-tier ad valorem duty structure, which increases the volatility of product prices. Domestic oil companies which have to pay the excise duty at the depot level pay an excise duty of 32% on petrol and 16% on diesel.
Accordingly, any importer too will pay a CVD of 32% and 16% on petrol and diesel respectively. But domestic oil companies are subjected to an escalation factor of 6% in the case of petrol and 3% in the case of diesel because of the ad valorem structure.