North Bloc Rules Out Customs Cut On Naphtha; CoS To Meet Today

New Delhi, October 24: | Updated: Oct 25 2002, 05:30am hrs
The finance ministry has turned down the power ministrys proposal to slash 10 per cent customs duty on naphtha being used for power generation. The issue will now be discussed at a meeting of the committee of secretaries (CoS) scheduled for Friday.

Senior government officials have told FE that the finance ministry is also against the power ministrys suggestion to de-link price of domestically produced naphtha from the import-parity price being charged by oil companies.

In a note to the CoS, the power ministry has suggested that oil companies be asked to work out the ex-refinery price of naphtha based on actual cost with a reasonable profit margin. However, officials say the finance ministry is of the view that de-linking of naphtha price from import-parity price is not possible in a deregulated regime. Oil companies are free to fix price of naphtha in the post-administered price mechanism regime and the government cannot ask them to reduce price of naphtha for the power sector. However, in its comments made on the recommendations of the power ministry to the CoSs note, the finance ministry has also communicated that it does not favour a zero customs duty regime for any sector, says a senior government official.

The power ministry feels that as naphtha is domestically produced, determination of price on import parity method by including notional charges such as port charges, freight, insurance, ocean losses, landing and demurrage and survey charges to arrive at the landed cost, is not appropriate and the oil companies should work out the ex-refinery price of naphtha based on actual cost.

At an international price of $200 per million tonne (FOB), the ex-refinery cost of naphtha will be around Rs 14,330 per mt. This could come to Rs 12,398 if additional duty on naphtha is exempted for power plants, say officials. The power ministry is also planning to shortly write to the states that fresh naphtha-based generation capacity should not be encouraged and concessions on naphtha prices will be applicable only to make those projects viable, which are at various stages of development.

Duty concessions on naphtha has been a long pending demand of Maharashtra for reducing tariff from the troubled Dabhol power project. In fact, tariff reduction is one of the main issues delaying the restart of Dabhol phase-I. Customs duty waiver is expected to bring down the cost of power from this plant by around 41 paise a unit.

Currently, seven private power projects and some projects of National Thermal Power Corporation have been exempted from excise duty/countervailing duty on naphtha. The power ministry is of the view that these concessions should be extended to all projects which have been cleared as naphtha-based plants. The power ministry has recommended that the same dispensation also be extended even to the ongoing private sector projects based on natural gas and which envisage use of naphtha as a back up fuel only.

This is important since in all cases, whether it is a private sector, state sector or public sector power stations, the cost of fuel is a pass-through and is eventually borne by the electricity board/distribution company and in turn by the consumer, says the note to CoS.