National Institute of Public Finance and Policy (NIPFP) director Ashok Lahiri has been entrusted with the task of examining the "irrecoverable taxes" on petroleum products, or state and local levies that the consumer does not pay for. At the moment the oil pool account absorbs some of the irrecoverable levies and freight, which may ultimately have to be swallowed by the oil companies themselves.

The committee headed by Lahiri has found adequate grounds for tax planning by the public sector oil companies in its `interim' findings. The product evacuation plans and marketing arrangements within the oil industry has already evolved into a kind of tax trap, good corporates should not find themselves in.

At the moment the oil pool account silently absorbs all the irrecoverables attached to controlled petroleum products, like motor spirit, diesel, kerosene and liquefied petroleum gas (LPG). The retail price of diesel (which is closest to the free market rates, being based on ("import-parity") only entails 20 per cent of freight for instance.

The remaining 13 per cent of the cost of transporting diesel to the consumer is still borne by the pool account. The list of "irrecoverable taxes" is rather long and can include anything from octroi on crude to the surcharge on sales tax, which cannot be passed on to the customer.

Even with the pool account and its ability to wipe out price disparities, the varying sales taxes of the 24 state governments create a wide disparity between the retail prices of controlled petroleum products. When price controls vanish in 2002 and the pool account with it, retail prices could grow even more disparate.

The whole debate on multiple taxation probably began with the confusion over who should pay sales tax for the Reliance Petroleum's refinery output. The public sector Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) are committed to market nearly 13 million tonne of motor spirit, diesel, LPG, kerosene oil and aviation turbine fuel (ATF) processed by RPL.

The petroleum ministry feels that there is really no confusion over who should pay the four per cent sales tax to the Gujarat government.

"Obviously, the buyer pays the sales tax," said sources in government, implying that Indian Oil, BPCL and HPCL would have to pick up the bill. Much of the RPL products will ultimately be marketed in other Indian states, like Uttar Pradesh or Punjab, where the sales taxes will vary. Oil consumers will obviously pay for state sales tax, but who will pay for the Gujarat government levy?

The little confusion has raised a broad question about the post-liberalisation marketing arrangements within the oil industry. Till April last year public sector oil companies were happily relying on "hospitality arrangements", that allowed them to lift petroleum products from the nearest refinery.

The new marketing arrangements are moving towards a more rigid system, fraught with tax tangles. Cochin Refinery's (CRL's) pact with Indian Oil Corporation for marketing its refinery output is an example.

CRL will pay a four per cent turnover tax when it sells its petroleum products to Indian Oil. When Indian Oil moves the products up north (through the Mangalore-Bangalore pipeline perhaps,) it will pay an eight per cent purchase tax, apart from the Central sales tax.

The tax tangle actually begins earlier at the crude purchase point, when the cost of the basic refinery input gets inflated because of the varying rates of octroi or entry tax, depending on where the crude came from. The mode of transporting the petroleum product from the refinery to the market place will also entail varying levies and varying rates of freight.

Transportation through pipelines may save on freight, but may entail multiple state levies, depending on how many state boundaries the products have to traverse. Tax planning therefore, will be among the key elements governing oil industry marketing arrangements in the years to come.

The panel headed by Lahiri is expected to provide some clues on how oil companies should plan their taxes in a liberalised climate.