State-owned IOC has threatened to reconsider plans to invest Rs 52,000 crore on expansion of Paradip refinery in Odisha and setting up a petrochem project as the state government is withdrawing tax sops. Indian Oil Corporation (IOC) plans to expand the 15 million tonne a year Paradip refinery by 5 MT as well as set up a Polypropylene Plant and a monoethylene glycol production facility at the site of the one-year old refinery.
Following BJD-led state government decision to roll back tax sops because the project was delayed by six years, the company is now threatening to reconsider future investment plans, sources privy to the development said.
The project is caught in a political cross-fire as Oil Minister Dharmendra Pradhan, who hails from the Odisha, and the state government are involved in a high pitched political battle. BJP is looking to capture power in state in 2019 assembly elections.
Sources said IOC is telling the Odisha government that it is reconsidering its investment plans because of the withdrawal of 11-year deferral of VAT on petroleum products sold in the state.
Investment plans also included projects to improve petrol and diesel quality to Euro-VI standards by 2020. If the investment does not take place, IOC will have to look for a market for fuel outside India as no petrol and diesel of lower quality can be sold within the country.
Also, the Rs 3,500 crore polypropylene plant is already under construction with September 2017 as the target date for commissioning. It remains to be seen if IOC can stop the project midway.
In the December 29, 2016 notice, Odisha government has asked why the fiscal incentives like 11-year deferment of sales tax on petroleum products sold in the state should not be withdrawn considering that the Rs 34,555 crore refinery was delayed by over six years.
Sources said the state government had in February 2004 signed an agreement with IOC to give fiscal incentives for setting up a 9 million tonnes a year oil refinery at Paradip by 2009-10. However, the project was delayed and started only in early 2016.
The delay is now being cited by Odisha to seek withdrawal of the incentives, sources said, adding that the state government feels the delay has pushed back the payback time of deferred taxes by few years.
Also, the state government says that the refinery was originally planned for a 9 million tonnes per annum capacity but the actual size commissioned was 15 million tonnes.
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Withdrawal of VAT deferment would mean an annual payout of about Rs 2,000 crore on 2 million tonnes of petroleum products sold in the state.
Sources said IOC has replied to the showcause notice saying the size of the refinery should not matter as VAT deferment is limited to 2 million tonnes of products sold in the state.
On delay in commissioning of the refinery, IOC says the Odisha government made clear its intentions of withdrawing the incentives in 2010 or 2011 itself to enable the company to redraw its plans.
More importantly, even if the refinery was commissioned in 2009-10, the VAT deferment would have been in operation till 2020-21 and there is no case for it ending in 2016-17.
The company said the state government will not suffer any revenue loss as it will pay back the taxes after 11 years albeit without interest on it.
IOC said its board had approved investments only in 2009 and the withdrawal of the VAT concession will reduce by 2 per cent the rate of return it considered for working out the investment.
Sources said the state government was of the opinion that the refinery no longer needs incentives as its profitability had increased due to a higher capacity and low global oil prices.
IOC said Paradip refinery is yet to achieve profitability on a standalone basis and that its investment in higher capacity and downstream petrochemical plants will only lead to higher economic activity and employment in the state.
Higher capacity was needed for setting up two petrochem units at an additional cost of Rs 7,250 crore. Originally, the foundation stone of the Paradip refinery was laid by the then Prime Minister Atal Bihari Vajpayee on May 24, 2000.