Compounding the folly

Updated: Nov 17 2005, 05:30am hrs
If the governments proposal to waive tax dues from PSU refiners is unjustified, the move to indirectly compensate Reliances Jamnagar refinery by a tax reprieve is worse. The problems genesis is the distorted government policy that forbade the private sector from retailing mass consumption petro-products till April 1, 2002. To compensate RIL for this handicap, buyers were allowed to load the higher price of Reliance products on the rest of the country thorough the oil pool, where all sale transactions were pooled before the price was determined. Reliances products were more expensive, since unlike in the case of PSUs for whom it was essentially an inter-depot transfer (and, hence, attracted no sales tax on movement across states), RILs sales attracted central sales tax (CST).

Post-April 1, 2002, however, the comfort of pooled pricing was gone and instead of the consumer, the taxpayer made good this amount. Budget 2002-03 provided for payment of irrecoverable taxes to PSU oil companies for buying Reliances products. No such provision was made in the following Budgets, presumably because by that time it was felt the rules of the game had changed and Reliance could set up retail outlets from April 1, 2002. This put it on par with PSU products. Against this backdrop, the attempt by the government to now propose compensation for a second year is totally unjustified. Remember, as per its letter of intent, RIL was to set up an export-oriented refinery, so even the case for permitting sales at the domestic tariff was pretty weak.

At the same time, allowing Reliance assured market access also meant enriching Gujarat at the expense of the rest of the country, since the state was then able to offer flexible tax options to induce investments in the state. This was possible only because of the central subsidy, paid for by the taxpayer! Gujarat is not alone. Riding piggy-back on the proposal to compensate Reliance, till recently Kochi Refineries Ltd was unable to recover certain entry taxes on crude oil in Kerala. Coming from a government that is so strapped for funds, such largesse is completely unwarranted. The government must stand firm.