Duty cut to avert fuel prices hike proposed

In what could be seen as another political gimmick for averting a hike in the prices of domestic petroleum products, a mid-term duty rejig in the petroleum sector was discussed at a high-level meeting convened by Prime Minister Manmohan Singh on Monday with the ministers of petroleum and finance.

Sources said the meeting discussed the possibility of excise duty reduction of up to Rs 2 per litre on petrol and diesel. The revenue implication of Rs 14,000 crore by way of this duty reduction was also discussed and it was proposed by the petroleum ministry that the government could recoup this revenue loss by increasing taxes on other commodities.

At present, a tax 54% and 32% is levied on retail selling prices of petrol and diesel in Delhi, respectively.

Sources also revealed that while petroleum minister Murli Deora pressed for a higher quantum of oil bonds, in order to save public sector oil marketing companies?Indian Oil, BPCL and HPCL?going into red, finance minister P Chidambaram was clearly not in favour of issuing oil bonds to OMCs repeatedly . To this, Deora is understood to have pointed out that the only alternative to oil bonds was to bring down the existing high-level of taxation, as it was not possible to hike the retail prices of petrol and diesel.

?Given the high stage political crisis surrounding the country, a hike in the prices of petrol and diesel seems unlikely. However, given the financial state of the PSU OMCs, an appropriate compensation package has to be announced to save them from reporting losses in the second quarter. Oil bonds, duty cut and higher subsidy sharing by the upstream oil companies?ONGC, GAIL and OIL ?are the only options available,? said a senior government official.

On its part, petroleum ministry has sought oil bonds worth Rs 20,000 crore. Despite opposition from the finance ministry, the government will clear oil bonds for, at least, Rs 15,000 crore in the Cabinet meeting slated for this week.

A judicious mix of reduction in excise duties and state taxes, along with moderating of consumer prices of fuels at an appropriate time has been proposed as a solution to cap the impact of surging oil prices in the international markets. Sources said the PMO is expected to shortly write to the state governments to reduce the VAT rate on petro products. International crude oil prices have already tested $82 a barrel last week and are currently hovering at close to $80 a barrel. The total under-recoveries of the three oil marketing companies?IndianOil, BPCL and HPCL?for the full-year are estimated at Rs 62,000 crore. The three OMCs are together losing around Rs 200 crore a day on retail sales of petroleum products. Sources said the possibility of introducing a price stabilisation fund for petrol and diesel to handle the situations, arising out of excessive volatilities, was also discussed at the meeting. Stabilisation fund smoothens price increase and in effect provides a subsidy during the period of high international prices to be balanced by a levy during the period of low international prices.

For, domestic LPG and PDS kerosene, Deora is understood to have conveyed that subsidy on these two products should be fully met in a transparent manner from the fiscal budget and needs to be targeted to intended beneficiaries only. In the last financial year, the government had cleared oil bonds worth Rs 28,300 crore.

Of this Rs 24,100 crore worth of bonds were disbursed to the oil marketing companies. The total under-recoveries in 2006-07 was around Rs 48,000 crore.