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Wednesday, Sep 22, 2004

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Ministry may revisit `irrecoverable taxes' issue with PSU refiners

Balaji C. Mouli

New Delhi , Sept. 21

THE Finance Ministry is reviewing its earlier decision against compensating public sector oil companies with `irrecoverable taxes' during fiscal 2003-04.

Irrecoverable taxes are those taxes that are levied by the State Governments on the refiner but not recovered from the consumer.

At the beginning of fiscal 2003-04, the Finance Ministry had made a provision for Rs 1,500 crore under the head. However, in the revised Budget estimate at the end of the fiscal, it withdrew the allocation on the grounds that such compensation would amount to transfer of resources from the Union Budget to the State Government.

The Finance Ministry has now written a letter to the Petroleum Ministry seeking details relating to the market structure in the petroleum sector. The queries relate to the nature of transactions in the States between the petroleum companies and the consumers, especially in regard to payment of irrecoverable taxes, such as turnover tax, that are levied by the State Government, etc.

Indirectly, the single largest beneficiary of this scheme, which was introduced in 2002-03, is Reliance Industries Ltd.

During 2002-03, Indian Oil Corporation (IOC) and other public sector marketing companies paid RIL around Rs 470 crore. The other major beneficiary was Kochi Refineries Ltd, 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.

Sometime in January this year, the Finance Ministry ruled out implementation of the Rs 1,500-crore scheme for compensating refineries on taxes levied by the State Governments during the current fiscal.

It argued that Reliance could set up retail outlets in neighbouring States and thus avoid payment of sales tax as it would then amount to inter-depot transfers that do not attract sales tax payment.

In the absence of compensation of the `irrevocable taxes', Reliance has had to absorb 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.

For fiscal 2004-05, neither the Petroleum Ministry nor the Finance Ministry are pushing for compensation of irrecoverable taxes.

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