No more CST compensation, rules MoF

New Delhi, Jan 26 | Updated: Jan 27 2005, 05:30am hrs
On the eve of Budget 2005, the finance ministry has turned down the petroleum ministrys long-standing proposal to compensate public sector oil companies with irrecoverable taxes for 2004-05.

Last week, the finance ministry told the petroleum ministry that only the Cabinet Committee on Economic Affairs could deliberate on this issue and that it would no longer be in a position to set aside funds for this purpose.

Irrecoverable taxes are those levied by the state government on the refiner but not recovered from the consumer. The finance ministry paid around Rs 800 crore in 2002-03, after which the scheme was discontinued.

Indirectly, the single largest beneficiary of this scheme was Reliance Industries Ltd, which received around Rs 470 crore from public sector oil companies Indian Oil Corporation, Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Ltd. The other major beneficiary was Kochi Refineries Ltd which received around Rs 200 crore.

Reliance was paid this sum towards the Central Sales Tax (CST) levied by the Gujarat state government on the petro-products sold by its Jamnagar refinery to the public sector oil companies outside the state and not recovered from the consumer.

The finance ministry has been doing a see-saw on the issue of compensation of irrecoverable taxes over the last two years. In 2003-04, although a provision was made in the beginning of the year, it was withdrawn at the revised estimate stage. The ministry then argued that Reliance could set up retail outlets in neighbouring states and thus avoid paying sales tax. This, since it would amount to inter-depot transfers that do not attract sales tax payment.

Prior to 2002, the government policy did not permit Reliance to set up retail outlets although it was in the refinery business. Post April 2002, although marketing business was deregulated, Reliance went slow on setting up retail outlets. Over the last one year, the pace has, however, picked up.

Last year, the petroleum ministry revived the issue of compensation of irrecoverable taxes and asked the finance ministry to reconsider it.

In the absence of compensation of irrecoverable taxes, Reliance absorbs the CST bill within the import parity price paid to it by the public sector oil marketing companies, thus taking a hit on its refinery margins.