The Hindu Business Line : Excise hike on ATF, duty cut on LPG, kerosene mooted

THE Petroleum Ministry has informally sounded the Finance Ministry for raising the excise duty on Aviation Turbine Fuel (ATF) from 8 per cent to 16 per cent. In return, it has sought a reduction in excise duty on LPG and kerosene from the prevailing 16 per cent to 8 per cent respectively.

This is one of the components of a package that the Petroleum Ministry and the Finance Ministry are working together to insulate the consumer from product price shocks. Currently, oil companies are under-pricing petrol by Rs 5 per litre and diesel by Rs 4 per litre. In the case of LPG, the difference is around Rs 130 per cylinder.

The other aspects of the package include the introduction of fixed rates of duties on products as against the prevailing ad valorem duty regime. In the ad valorem regime, the revenues to the exchequer go up when the global product prices rise. In the fixed price regime, the revenues are fixed, independent of the global prices. This component of the package is aimed at curtailing the cascading effect of the ad valorem tariff structure when global prices rise.

Another component of the package under discussion is the introduction of a price stabilisation mechanism. Here, the companies set consumer price freely when the crude price is in a predetermined price band, say $22-28 per barrel, which is acceptable to both the oil producers and the product distribution companies. In the event that the crude price rises beyond the $28 per barrel mark, the oil producing companies, like Oil and Natural Gas Corporation (ONGC) pass on the profits reaped beyond the $28 per barrel mark and subsidise the sale of products by the retailers. In the event that the crude price dips below the $22 per barrel mark, the retailers make good the loss in profits below the $22 per barrel mark to the crude producers.

In the case of sale of LPG, the Petroleum Ministry recently conducted a study and found that the oil marketing companies are overpricing the price of LPG cylinders by Rs 20 per cylinder. This, since the replacement life cycle of the cylinder assumed to be around 10 years while in reality the oil marketing companies do not replace the cylinder even after ten years. The Petroleum Ministry will be shortly informing the oil marketing companies to reduce the cost of the cylinder by around Rs 20 per cylinder, thus blunting the burden on the consumer.

The other possible decision that will bring down the liability on the consumer is the stretching of the subsidy window on sale of LPG and kerosene from three years to five years. While this is set to increase the subsidy burden on the exchequer by a factor of half, it will release a stream of revenues for the oil companies that will bring down the burden on the consumer.

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