Fearing oil refineries will be hit hard by the finance ministry's move to change the way petrol and diesel are priced, oil minister M Veerappa Moily has asked Prime Minister Manmohan Singh to constitute an expert committee to decide on the issue.
The finance ministry has informed the petroleum ministry that auto fuel needs to be priced at export parity rather than import parity as the 2.5% customs duty was adding to the under-recoveries of the state-run oil marketing companies without contributing any revenue to the exchequer.
"Immediately switching over to export parity, whether it is possible or feasible is a question which has to be examined," he said.
Oil companies, Moily said, feel the new pricing norm would make oil refining a difficult business.
"I am suggesting to Prime Minister that an expert committee, like the previous ones headed by C Rangarajan and Kirit Parekh (based on whose suggestion trade parity pricing was adopted), can be constituted," he said.
Moily said India's surplus refining capacity, which enables export of large volumes of petroleum products, was a strength and if refineries do not function to their full capacity, imports of fuel would add to the current Rs. 7,00,000 crore of oil import bill.
Sources said Indian Oil, Hindustan Petroleum and Bharat Petroleum together are projected to end the fiscal with close to Rs. 1,60,000 crore of under-recoveries or revenue loss on selling diesel, domestic LPG and kerosene below cost.
Upstream oil companies like ONGC are to meet about Rs. 60,000 crore of this and the rest Rs. 1,00,000 crore was to come from the government as cash subsidy. By changing the pricing methodology, the Finance Ministry wants to cut its cash outgo by about Rs. 18,000 crore in the current fiscal.
Sources said like any other product, traditionally domestic refiners enjoyed 5% 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.
Sources said the finance ministry has informed the oil ministry that it plans to remove the 2.5% import tax on petrol and diesel since the duty on diesel was adding to the under-recoveries of the state-run oil marketing companies (OMCs) without contributing any revenue to the exchequer.
This would lead to a change in the methodology for calculating the under-recoveries. The imported price of petrol and diesel, which includes customs duty, is used by the refineries to calculate the prices charged from retailers.
The difference between this price and the pump price is the under-recovery or revenue loss.
While the government had freed petrol from its control, diesel continues to be subsidised. There is no import duty on kerosene and LPG, the other two subsidised fuel.
At 2.5%, its net effect is 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.