Molasses unlikely to get Cenvat gains, ethanol blending to be hit

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New Delhi | Updated: September 17, 2015 1:02:12 AM

The finance ministry is learnt to have rejected the food ministry’s proposal to amend the central value-added tax (CENVAT) rules to allow the excise duty paid on molasses to be Cenvatable, sources said on Wednesday. The decision by the department of revenue would drastically trim benefits to ethanol producers from the recent decision by the Cabinet Comittee on Economic Affairs (CCEA) to scrap the excise duty on this bio-fuel from the next sugar season starting October 1 and severely undermine the Union government’s push to achieve a 10% ethanol blending with petrol.

This is because the excise duty on ethanol was earlier cenvatable against that on molasses. So while the full (and intended) benefit of the removal of the 12.5% excise duty on ethanol works out to roughly R5 per litre, the effective gains to producers now would be just around Rs 2 per litre.

Since the country has the capacity to produce 224 crore litres of ethanol annually as of now, the potential gains denied to cash-starved sugar mills that produce this bio-fuel would be R672 crore in a year. The revenue department’s move would be against the spirit of the decision by the CCEA in April, industry executives said.

Since ethanol producers are already struggling to supply due to states’ unwillingness to abolish levies on the inter-state movement of the bio-fuel and also effect administrative reforms, including digitising the excise permit processes, the latest move may further discourage them to commit supplies to oil marketing companies (OMCs).

OMCs have invited expression of interests seeking supplies of 266 crore litres for implementing the proposed 10% ethanol blending with petrol in 2015-16.

“This is a tricky situation for sugar mills. OMCs — which had practically resisted the effective implementation of the 5% blending programme in the past by inordinately delaying the finalisation of supply tenders — would argue yet again that suppliers are not able to provide ethanol for the blending programme. But this is not true,” said a senior executive with a UP-based sugar company.

Industry executives said several barriers are obstructing the implementation of the blending programme: levies imposed by various states on the inter-state movement of ethanol despite it being a central subject, mandatory requirement of various excise permits, often to be submitted manually, and fixed prices of ethanol for supplies to far-away states. No wonder, the country could achieve only 1.4% ethanol blending with petrol in the last fiscal, even lower than the 2013-14 level of 2%.

The government first proposed the blending of ethanol with petrol at a 5:95 ratio in 2003 and even made it mandatory later. In December 2013, the Sharad Pawar panel mooted doubling the blending limit to 10%, which was re-iterated by the CCEA in April 2015. Last month, Prime Minister Narendra Modi directed ministries concerned to look for ways to make the proposed blending programme a reality soon.

Recently, a study by McKinsey said the country could potentially save as much as $1.7 billion a year if 10% ethanol blending with petrol is strictly implemented. The savings will be in the form of less oil imports to that extent.

States continue with ‘illegal levies’ on intra-state ethanol movement

According to the entry 8 of the state list, states can legislate on “intoxicating liquors”, that is on production, possession, transport, purchase and sale of such alcohol. Bringing clarity to the issue, the Supreme Court, in a judgment in the Synthetics & Chemicals vs the state of Uttar Pradesh case, has ruled that once the denaturant has been added to alcohol, it becomes unfit for human consumption and hence “the state legislature has no authority to levy duty or tax on alcohol which isn’t fit for human consumption, as that could only be levied by the centre”.

Making a case for the levies, some states argue that producers may divert alcohol in the garb of ethanol, to which suppliers say the inspector deputed by the state at every distillery may check the substance and clear it. Moreover, it’s the duty of the states to ensure compliance with the Supreme Court verdict and not to contravene law citing difficulty in compliance. Recently, Union food minister Ram Vilas Paswan had written a letter to states, asking them to scrap the levies, but no state has complied so far.


While Uttar Pradesh imposes a levy of Rs 1 per litre for ethanol supplies outside the state, Maharashtra charges
Rs 1.50 per litre.

Also, as many as nine states, including Gujarat, Maharashtra and Delhi, impose levies up to R3 per litre on ethanol that comes from other states. Some state governments are not only imposing levy on molasses but also regulating the movement of even non-levy molasses, Paswan had said in his letter.

Fixed pricing for long-distance supplies hurts producers

The centre has also stipulated that mills have to sell ethanol at Rs 49.50 per litre at the depot of OMCs locating beyond 300 km. This is a loss-making proposition for mills that have to supply at depots in far-away places due to huge transportation charges. Producers feel if the government decides to reimburse for extra distance beyond 400-450 km, they will be encouraged to supply even to far-away states.

Delay in getting excise permits

Moreover, the refusal of the excise departments across various states to communicate electronically even for routine stuff makes the matter worse for ethanol suppliers.

A producer wishing to supply ethanol, say, to Punjab from Uttar Pradesh has to first approach the excise department of the Punjab government for a permit. He then has to submit it with the UP government, and, curiously, the state government would again cross-check with the Punjab government about the no-objection certificate obtained by the supplier. If satisfied with the reply of the Punjab government, the producer will be allowed to transport ethanol out of UP.

Since all these communications take a long time to happen, and leaves adequate scope for bribery and high-handedness by excise officials, producers are often unwilling to supply outside their respective states. And when they are willing, they find it difficult to deliver on time.

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