Under recovery math to stay for now

Written by Gireesh Chandra Prasad | Gireesh Chandra Prasad | New Delhi | Updated: Jun 30 2010, 05:28am hrs
The Centres decision to withdraw its control over the pricing of petrol and diesel may not immediately lead to a change in the way state-owned oil retailers calculate their losses due to selling fuel at government-fixed prices. Also, the Centres proposed review of how the financial burden from selling cheap fuel will be shared with public sector firms is unlikely to change the manner of calculating losses incurred by state-owned fuel retailers.

Experts and government-appointed committees had voiced concerns over the manner of calculating under recoveriesthe revenue loss of fuel retailers due to selling fuel at state-fixed prices. Refinery-cum retailers calculate estimated losses using trade parity price of petrol and diesel (weighted average of 80% import and 20% export price). One factor which makes the calculation of under-recovery questionable is the difference in the import duty on crude and finished products. While import of crude attracts a customs duty of only 5%, petrol and diesel attract 7.5% each.

Since refinery-cum retailers actually import crude, which has a lesser import duty, and calculate the under recovery of petrol and diesel using a formula that comprises the higher import duty on petrol and diesel, the under-recovery on these two finished products is overstated, according to experts.

Refinery-cum retailers, however, do not agree. Finished petroleum products attract different rates of import duty. Although petrol and diesel have higher import duty than crude, other petroleum derivatives like kerosene and LPG attract zero import duty, a senior official of a leading refinery-cum retailer said on the condition of anonymity. This means the import price used to calculate the under recovery on LPG and kerosene do not have tax components, although crude is imported after paying 5% customs duty. The higher tax element on the under recovery of petrol and diesel offsets the absence of tax in the case of LPG and kerosene, which are also derived from tax-paid crude.