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Oil firms to continue suffering

National oil firms will continue to suffer as the budget failed to raise subsidy on cooking gas, kerosene in tandem with no change in duty structure.

india Updated: Feb 28, 2006 16:17 IST

National oil firms, which for the first time ever reported net losses this fiscal, will continue to bear the brunt of high global oil prices as the Budget failed to raise subsidy on cooking gas and kerosene in tandem with no change in duty structure.

But, Finance Minister P Chidambaram raised cess on crude oil produced by ONGC and OIL to Rs 2500 per tonne from Rs 1800 per tonne, to garner over Rs 1800 crore.

The only silver-lining was the 'Declared Goods' status accorded to LPG supplied for domestic use, thereby attracting a uniform Central Sales Tax of 4 per cent as against current rates which vary between 4 to 14 per cent. However, it was not immediately clear if fuel retailers - IOC, BPCL, HPCL and IBP - who together lost Rs 9,680 crore this fiscal on selling LPG below production cost - would pass on the relief to consumers.

The industry was expecting rationalisation of duties on petrol, diesel, LPG and kerosene, as had been suggested by the Prime Minister-appointed C Rangarajan Committee, to help retailing firms which posted a net loss of Rs 2898 crore in first nine months of 2005-06 fiscal.

The Budget for 2006-07 provided Rs 2900 crore towards subsidising domestic LPG and PDS kerosene, the same as in the current year.

During the current fiscal, the Government provided Rs 22.58 per cylinder direct subsidy and fuel retailing firms had to bear the Rs 148 per cylinder difference between cost of production and retail selling price. On kerosene, Government provided Rs 0.82 per litres subsidy leaving Rs 12.14 a litre to be borne by oil firms.

While upstream firms ONGC/OIL/GAIL contributed about half of the estimated Rs 23,700 crore loss on sale of LPG and kerosene in 2005-06, the Government decided to issue oil bonds worth Rs 11,500 crore to compensate the remaining.

Besides the Declared Goods status for domestic LPG, the only other plus for the oil sector was pipeline projects for transportation of crude oil, petroleum products and natural gas being notified as project imports.

This essentially meant that imports for laying the pipelines would attract lower customs duty than peak rates.

The Budget also halved customs duty on naphtha and petroleum coke while unifying the same on natural gas including propane and butane at 5 per cent.

While natural gas import currently attracted 5 per cent import duty, LPG (made up of propane and butane) had nil duty.

The Budget also exempted petroleum crude, kerosene for PDS, LPG for domestic supply, petrol, diesel, coal, coke and petroleum gaes and fuel from 4 per cent special additional duty of customs.

The Rangarajan Committee on fuel pricing had suggested a steep Rs 75 per cylinder raise in domestic cooking gas (LPG) price and a moderate Rs 1.21 per litre increase in petrol and Rs 1.96 per litre hike in diesel prices.

On taxation, it had recommended a revenue neutral rationalisation wherein customs duty on petrol and diesel was to be cut to 7.5 per cent from current 10 per cent and changing excise duties on petrol and diesel (currently at 8 per cent plus Rs 13 a litre and 8 per cent plus Rs 3.25 per litre respectively) to Rs 5 per litre on diesel and Rs 14.75 a litre on diesel.

These coupled with discontinuation of the practice of asking ONGC/GAIL/OIL to provide discounts to IOC/BPCL/HPCL to share the burden arising from being forced to sell LPG and kerosene below cost, and raising cess on domestic crude oil would have helped resolve the present crisis in retailing.