Paying the price at the petrol pump

Written by Anupama Airy | Updated: Aug 13 2008, 04:16am hrs
With the government lacking the will to take tough decisions for the countrys oil sector, reports by expert committees, like the most recent one headed by the member Planning Commission, BK Chaturvedi, on the financial position of oil companieswill soon become meaningless.

Before the Chaturvedi committee, it was the expert committee headed by C Rangarajan in 2006which came out with some path breaking suggestions to correct the taxation and pricing anomalies in the oil sector. However, as the government decided to overlook most of the suggestions made by the Rangarajan committee, the identity of the report is like any other document in one the dusty racks of the Shastri Bhawan.

The fate of the Chaturvedi committee report will be no different, even though the committee was constituted by none other than the Prime Minister Manmohan Singh to resolve the crisis existing out of high international oil prices. Witness the initial comments to the recommendations of the Chaturvedi panel. Petroleum minister, Murli Deora said, It will be premature to assume that the suggestions made by the committee were being implemented. We have to do a serious analysis even before we think of implementing it. Deoras perceptions of the recommendations made in the report is evident.

Another cabinet minister said, There is no chance that prices of fuel will be increased. With inflation at its highest level and this being an election year, how do expect us to take such unpopular decisions.

While there is no denying the fact that at a time when inflation has crossed the 12% mark, it is nearly impossible to immediately raise the consumer price of petrol and diesel monthly by Rs 2.50 per litre and 75 paise a litre respectively, as suggested by the Chaturvedi committee.

However, the committee suggestion that the government should disengage itself from the process of pricing of petroleum products, and allow pricing to be an outcome of a competitive market process needs to be followed gradually.

Another recommendation, which will also die a natural death, is the one relating to restricting the entitlement to subsidised LPG supply to 6 refills in a year. In the subsequent year, the committee said this supply be further reduced to 4 refills and in the next two years to 2 and nil respectively. It is estimated that the average number of refills per household presently is 7.43.

Households should be encouraged to subscribe to the piped city gas network wherever available. LPG subsidy for BPL families should, as in the case of SKO, be eventually provided directly through smart cards or cash transfer mechanism, the committee said in its report.

However, the recommendations by the committee such as imposing a metro extra tax of Rs 2 on diesel in large and metro cities, where subsidised diesel is being used to run private cars and sport utility vehicles, needs to be carefully looked into.

Similarly, the suggestion of the Chaturvedi committee to fix the refinery gate price of petrol, diesel, PDS kerosene and domestic LPG on the free on board (FOB) export prices as against the present trade parity one is also worth looking at.

As per the committee, by changing the pricing basis to export FOB prices (and not trade parity or import parity) the refineries have been placed on a more challenging basis, where the protection that has been accorded to them by way of ocean freight and import duty has been taken away.

It is appropriate in our view that the Indian refining industry, which has world-sized companies, be placed on par with the international refining business. Then the committees recommendation to levy a special oil tax (SOT) on the domestic producers of crude oil on pre-NELP leases is also noteworthy.

This tax, as per the committee, would kick in at $75 per barrel and the rate for revenues above that is 100% in the case of ONGC and OIL where the government had infused the initial capital and has otherwise supported the companies from their inception.

In case of private companies and joint ventures who have entirely funded their exploration & production programme, a rebate of 60% may be extended; thus their effective rate will be 40% of the revenue in excess of $75 per barrel. This tax will be fully deductible for the purpose of assessment to income tax, any other taxes and royalty.

This tax is visualised as a purely temporary measure for financing the graduated adjustment of the selling price of automotive fuels, SKO and domestic LPG and is not visualised as a general revenue measure.

Once the adjustment of prices of automotive fuels is completed, the committee has suggested that this tax could either be annulled; or reset downwards to equal the fuel subsidies being made available only to BPL families for SKO and LPG under the revamped scheme where, with the exception of tribal and remote regions, (a) the disbursal of subsidy is through smart cards or direct bank transfer and (b) the actual sale of the product is at full market prices on an unrestricted basis.

The committee has further proposed that the import duty on petrol and diesel be made zero as has been done in the case of crude oil, domestic kerosene and LPG. It has been recommended that the excise duty on motor spirit be temporarily reduced to allow faster adaptation of the motor spirit price to reflect international price and cost conditions and then be restored by March 2009.