Fearing oil companies will be hit hard by the finance ministry's move to cut subsidises by changing pricing of petrol and diesel, oil minister M Veerappa Moily has asked finance minister P Chidambaram to refer the issue to an expert committee.
The finance ministry has informed the petroleum ministry that auto fuels need to be priced at a rate at which it can be exported.
Currently, price of petrol and diesel at refinery gate is calculated by adding 2.5% customs duty and freight of shipping the fuel to the international prices.
The finance ministry wants to eliminate freight as well as the 2.5% customs duty from the pricing as the duty was adding to the under-recoveries of the state-run oil marketing companies without contributing any revenue to the exchequer.
The difference between the refinery gate price and retail selling price is under-recovery which the government compensates from Budget.
Elimination of freight and duty will lower its subsidy outgo, the finance ministry feels.
The oil ministry, however, feels that oil companies have to actually pay import duty as well as freight on crude oil, the raw material for making petrol and diesel, and denying the same would play havoc with their finances, sources said.
Moily earlier this week wrote to Chidambaram seeking constitution of an expert committee to decide on the issue.
Sources said he feels the current pricing methodology was suggested by expert panels headed by C Rangarajan and Vijay Keklar and the new pricing model proposed by the finance ministry would sound death knell for oil refineries.
The finance ministry felt that the current pricing was protectionist and promoted inefficiencies in the system.
To the finance ministry's argument that refineries in north-east performed better than units at locations such as Panipat, the oil ministry said refineries in north-east enjoyed excise duty exemption that made them more profitable.
Sources said like any other product, traditionally domestic refiners enjoyed 5 per cent duty protection by way of higher customs or import duty on petroleum products (finished product) than on crude oil (raw material).
So, if crude oil attracted 5% import duty, finished product was charged a customs duty of 10%.
A few years back, the duty on finished products was brought down to 7.5% and crude oil to 2.5%.
In fact, the duty on crude oil was brought to zero and that on products to 2.5% a few years ago, effectively reducing the protection refiners enjoyed from flooding of domestic market with cheaper imported fuel.
Now, if the import duty on fuel is brought down to zero, the refineries will have no protection.
The 2.5% import duty results in an increase of Rs 1.13 per litre on the ex-refinery price of diesel.
This translates into an under-recovery of Rs 18,000 crore.
On petrol, the customs duty impact is about one rupee but it is passed on to the consumers and there is no impact on government's subsidy bill.