A full deregulation of diesel prices, apart from reducing the governments subsidy burden, will create a level-playing field for the private and public OMCs. The savings accruing to the government because of deregulation can be used for welfare schemes and by E&P companies for exploration, which will improve Indias energy security. Diesel price hikes stoking inflation is an unfounded notion. Prices of, say, onion and potato wont increase by more than 10 paise per kg even if diesel price is hiked by R5/litre at one go (assuming a 500-km farm-to-plate journey on a 10,000-kg capacity truck, the incremental cost per kg is actually only a few paise).
A policy framework to allow infrastructure-sharing amongst refinery companies should be drawn. Players should be allowed to draw products from each others location at transfer price, which will eliminate duplication in logistics and trim avoidable costs. Reduction/savings in the spend on logistics will be passed on to the consumers. As for product-exchange between oil companies, taxation laws should be modified to optimise the supply-chain cost across the country. The entire pipeline network should be declared a national asset and brought under one management while being available to all OMCs at a reasonable cost on open-access basis.
Only specified goods imported for E&P operations are exempt from customs duties. To encourage E&P activity, the existing list of exemptions should be amended to include all goods required. With effect from April 1, 2009, a seven-year tax holiday is available only to blocks assigned in NELP-VIII and CBM-IV. Earlier, this benefit was available to all the blocks. Many companies had claimed this benefit before April 2009 on the blocks other than those allocated under NELP-VIII and CBM-IV. This should be extended to all mineral oil and natural gas blocks to avoid distortion in the costs of production. As CBM has low production volumes, a sliding scale production based royalty, i.e. royalty rate increasing/decreasing with increase/decrease in production volumes, may be adopted.
Excise on branded fuel
There is a huge difference between the excise duty rates imposed on branded and unbranded fuels. While branded petrol is levied a basic excise duty of R7.5/litre, the same is R1.2/litre on unbranded petrol. Similarly, branded diesel attracts a basic excise duty of R3.75/ litre, while that on unbranded is R1.46/litre. Thus, the sale of branded fuels has fallen to negligible levels despite these being more efficient. Excise duty on branded products should be on par with that levied for unbranded products.
The central sales tax (CST) was to be phased out by March 31, 2010, yet it stands at 2%. The government must phase out CST which sometimes makes the domestic product costlier than imports.
The government should encourage new investments in the refinery sector by granting tax holidays given that refineries bring in large investments, growth in export/forex earnings, provide energy security and are large employment generators. The customs duty on machinery import for greenfield/brownfield refinery expansion should be eliminated to enable competitive edge.
We import natural gas at $16-18/mmBtu, but it can be produced locally at less than $8/mmBtu and supplied around that price. The government should clarify the policies on cost recovery, profit sharing and the pricing of gas.
VAT on diesel
The current VAT on diesel is about 20%. If diesel price rises by 50 paise/litre, then 10 paise/litre goes to states as an unintended benefit in the form of incremental tax revenues. If the VAT rate for diesel is reduced or levied on specific basis, there will be no effect on the revenue generated and will ease the price burden on the common man. The VAT rate can be reduced through either reduction in schedule rate of VAT base on selling price or by levying VAT on the current selling price notwithstanding any increase due to deregulation of diesel, or linking the VAT rate to quantity sold instead of the price.
The author is the MD & CEO of Essar Oil. Views are personal