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As North Block says no to reimbursement scheme... Oil Ministry moots 4 pc addl duty on petro goods

Balaji C. Mouli

New Delhi , Nov. 27

THE Petroleum Ministry has mooted levy of 4 per cent Special Additional Customs Duty (SAD) on mass consumption petro-products, petrol, diesel, LPG and kerosene.

In a recent letter to the Finance Ministry, the Petroleum Ministry has mooted this as a solution to the problem of taxes levied by the States that are not recoverable from the consumer.

Eight months after providing a Budget provision for payment of such taxes amounting to around Rs 750 crore per annum, the Finance Ministry has refused to allow the scheme for such reimbursements. It has raised several objections against the scheme including the fact that there is no Budgetary support in other sectors.

Levies such as entry tax on crude, octroi tax and Central sales tax (CST) are not entirely allowed to be recovered from the consumer in several States leading to the refineries located in the respective States taking a hit on their margins.

Till April 1, 2002, when the Administered Pricing Mechanism (APM) in the petroleum sector was dismantled, the Oil Pool Account (OPA) bore the bill.

The OPA was an account managed by the Government to manage the sale of subsidised LPG and kerosene through over-pricing petrol and diesel sold by the petro-marketing companies. For fiscal 2002-03, the Union Budget provided for Rs 1,500 crore under the head "irrevocable taxes." Of this, around Rs 750 crore was disbursed. The Union Budget 2003-04 also provided for Rs 1,500 crore, but the Finance Ministry is not willing to reimburse such taxes.

In view of this, the Petroleum Ministry has recently written to the Finance Ministry stating that either the Government introduce legislative measures for levy of State-specific surcharges or impose 4 per cent SAD on petro-products.

State-specific surcharges are a legacy of the pre-APM days that still continue. Under this scheme, most of the taxes levied by the State are recovered from the consumers in the State through levy of a surcharge on the price of petro-products sold within the State.

In the absence of any legislative measure to back up the surcharge scheme, the petro-marketing companies run the risk of States questioning and disallowing the surcharge levy. In fact, this is the reason for the over-provisioning of "irrevocable taxes" in the Budget for last year and this year as well.

In this backdrop, the Petroleum Ministry has asked for legislative measures to eliminate the risk of the surcharge schemes.

This way, the States will not be able to export taxes. However, this scheme fails to address the competitiveness of imported petro-products.

Competitiveness of imports arises due the fact that the imported products do not attract Central sales tax which is payable when goods are transferred from one State to another.

In the alternative proposal for a 4 per cent SAD of customs levy on products, the refiners across the country will benefit. This is because the refinery margin is dictated by the differential in duty between the customs duty on products and that on crude.

The flip side of this proposal is that even in States where the levies are entirely recovered, the refiners will gain.

The refiner's gain will translate into a hike in retail prices across the country and not in only those States levying the tax.

Call for specific excise duties

AS part of the Budget proposal to the Finance Ministry, the Petroleum Ministry is planning to seek specific excise duties on petro-products as against the prevailing ad valorem rates. It is in the process of finalising the duties. In the ad valorem regime, when international prices rise, greater revenues accrue.

Similarly, when the international prices drop, the revenue inflows reduce.

In a fixed rate regime, the revenue is dependent on the volume of imports and not the international price and hence lesser risk in prediction of revenues.

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