The finance ministry has ordered a review of taxes on petroleum products to identify distortions caused by the existing tax structure, including a possible overstatement of the losses incurred by oil marketing companies (OMCs) Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum.
The department of economic affairs, the finance ministry’s wing that anchors the Budget-making exercise, has asked a leading city-based public finance and policy think tank to study existing taxes on petroleum products and make recommendations, said a ministry official, who asked not to be named.
The need for a review of fuel taxes was recommended to the ministry by the parliamentary standing committee on finance chaired by the BJP's Yashwant Sinha. Sinha said at an Indian Express Idea Exchange programme on Thursday that the committee had appreciated a “very, very informed” report on the subject prepared by a similar parliamentary panel on petroleum. The former finance minister said the standing committee on finance has already had a round of discussion on the subject with finance ministry officials. “We have decided that in our next sitting, the ministry of petroleum officials would also be there so that we could jointly discuss it with them,” said Sinha.
On the one hand, the government gives huge cash compensation to state-run oil companies for selling fuel at regulated prices and, on the other, it collects hefty taxes on fuel. In fact, the central and state governments combined collected R2.25 lakh crore from the petroleum sector in 2010-11, while the central government gave cash compensation of R41,000 crore in that year. The government is keen to find out if oil taxes and marketing losses of oil companies are related.
During a debate on the demand for a parliamentary nod for an extra R28,500 crore for the OMCs on Friday, finance minister P Chidambaram said he was looking into the taxes on petroleum products. Chidambaram said when he would stand up to present the 2013-14 Budget, he may be better placed to spell out a blueprint for fiscal consolidation.
One of the issues that the discussion of parliamentarians as well as the ministry’s review would be addressing is whether taxes have an impact on the losses calculated by fuel retailers that, in turn, has a bearing on government subsidy.
There has been criticism that the basic customs duty on petrol and diesel gets built into the marketing loss calculations of the two auto fuels although these are not imported but are produced at local refineries. Crude oil attracts only a Rs 50-a-tonne national calamity contingency duty (NCCD) and no basic customs duty. However, both petrol and diesel attract a 2.5% basic customs duty and a 3% education cess. That is the effective tariff protection given to domestic refineries against any possible import of finished petroleum products. Only state-run refineries get that protection as private refiners currently do not retail fuel in India due to strict price regulation.
Experts say the marketing losses of public refiners are questionable because they use the trade parity prices (weighted average of 80% import and 20% export price) of the fuel in calculations, although they do not import fuel. Instead, they extract finished products at own refineries from crude oil, on which they have paid far less import duty.
Oil companies, however, do not agree with this argument. They say that both domestic cooking gas and kerosene sold through public distribution system do not attract any customs duty but they have to pay Rs 50 a tonne NCCD on crude oil imports. That is, the import price used to calculate the marketing losses on these two products do not have customs duty component although they pay some taxes on crude. The higher tax element on the under-recovery of petrol and diesel offsets the absence of tax in the case of LPG and kerosene, which are also derived from tax-paid crude.