The Hindu Business Line : Irrevocable taxes: Refiners may get compensation

THE Finance Ministry is reconsidering the possibility of compensating domestic refineries with `irrevocable taxes.' In November last year, the Ministry had turned down the compensation despite the fact there was a budgetary allocation of Rs 1,500 crore for the purpose in fiscal 2003-'04.

Irrevocable taxes are those levies that are imposed by state governments but are not allowed to be recovered from the consumer.

In a recent meeting with the Petroleum Ministry, the Finance Ministry decided to revisit the issue of payment of irrevocable taxes and consider the various options.

If the Finance Ministry decides to pay up the irrevocable taxes, the main beneficiaries will be Reliance Industries Ltd (RIL) and Kochi Refineries Ltd (KRL). While Reliance will gain nearly Rs 470 crore, KRL will benefit about Rs 200 crore.

Sometime in January this year, the Ministry ruled out implementation of the Rs 1,500-crore Budget scheme for compensating refineries on taxes levied by the state governments during the current fiscal. It reasoned that such compensation would amount to transfer of resources from the Union Budget to the state governments. In the case of compensation to Reliance that is routed through the public sector refiners, Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL), the Ministry argued that the tax incidence could be avoided if the private sector refinery major sets up its retail outlets in the States neighbouring its 31-million-tonne refinery at Jamnagar in Gujarat.

Under this irrevocable taxes compensation scheme that was operational in fiscal 2002-03, IOC and other public sector marketing companies paid RIL around Rs 470 crore during 2002-03. The other major beneficiary was KRL, which received around Rs 200 crore.

Reliance was paid this sum towards the Central Sales Tax (CST) levied by the Gujarat Government on the petro-products sold by its Jamnagar refinery to the public sector oil marketing companies outside the State and not recovered from the consumer. The Ministry argued that by setting up retail outlets in neighbouring States, Reliance could avoid payment of sales tax, as it would amount to an inter-depot transfer of products.

In the absence of compensation of `irrevocable taxes' Reliance has two options. Either it absorbs the Rs 470-crore CST bill within the `import parity' price paid to it by the marketers, thus taking a hit on the refinery margins. Import parity price comprises the landed cost of the product and the customs duty.

Else, it amends its agreement with the State Government, which allows for an option to waive the CST. In the existing arrangement, the CST is `deferred' for 15 years, which enables Reliance to charge the levy from its buyers and retain the CST amount billed for that period.

In case the CST is waived, Reliance will not be able to raise the CST bill and enjoy the benefit of interest-free money for 15 years.