The Hindu Business Line : Duty rejig on petrol, diesel likely in Budget

Cutting loss
The reduction in petrol and diesel prices has resulted in an under-recovery of Rs 2.30 per litre of diesel for the oil companies, while the profit of Rs 2 that they were making on petrol has been neutralised.
With crude prices now lower by at least $10 per barrel, the amount of bonds that needs to be issued to compensate the loss has dropped to around Rs 50,000 crore.

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New Delhi Feb. 18 Having followed the Government's instruction last week to lower petrol and diesel prices, oil marketing companies are likely to get the promised concession in terms of duty reductions on petrol and diesel in the forthcoming Budget.

The Government is understood to be weighing the possibility of reducing customs duty on petrol and diesel to 5 per cent from 7.5 per cent now. Similarly, ad valorem excise duties on the two products are also tipped to fall to 6 per cent from the current 8 per cent. However, the specific excise duty - Rs 13.26 per litre on petrol and Rs 3.32 per litre on diesel - will remain unchanged.

The reduction in petrol and diesel prices by Rs 2 and Re 1 per litre from the midnight of February 15 has resulted in an under-recovery of Rs 2.30 per litre of diesel for the oil companies, while the profit of Rs 2 that they were making on petrol has been neutralised.

Oil bonds

The duty reductions are estimated to make good Re 1 of the Rs 2.30 under-recovery on diesel. The balance is likely to be covered through issue of additional oil bonds totalling Rs 1,250 crore. The Government has already issued oil bonds worth Rs 19,150 crore out of the Rs 28,300 crore promised in June 2006 when rising global oil prices caused a Rs 73,500-crore under-recovery hole in oil company balance sheets. That was when global oil prices were nudging past the $67-per-barrel mark.

With prices now being lower by at least $10 per barrel, the amount of bonds that needs to be issued has dropped to around Rs 50,000 crore. A reduction in customs duty on petrol and diesel will bring the two products on par with crude oil, which also suffers a 5 per cent import duty. This will also bring down the effective protection enjoyed by refineries significantly as the landed cost of the two products will fall.

Consequently, gross refining margins (GRM) are likely to take a hit. While integrated refining and marketing companies such as IndianOil, Bharat Petroleum and Hindustan Petroleum will be compensated by an increase in marketing margins, stand-alone refining companies such as Chennai Petroleum, Kochi Refineries and MRPL will suffer as they do not have the benefit of marketing margins.

Private refiner Reliance Industries will not be impacted as it exports almost its entire production of transportation fuels. The reduction in customs duty will not result in any loss of revenue for the Government, as there is practically zero import of the two products into the country.

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