The Telegraph
Since 1st March, 1999
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Second-degree burn for oil firms

New Delhi, July 11: The move to slash the subsidy on LPG and kerosene to Rs 3,500 crore from Rs 6,300 crore in 2002-03 and the 2 per cent education cess slapped on customs and excise duties is bound to put a higher burden on oil companies. The double whammy comes at a time when international prices of crude are ruling much higher than last year.

The oil majors are pressing for a price hike but the decision on this will be influenced more by politics than plain economics.

The oil companies have been demanding a reduction in the customs duty on crude oil or even a revenue-neutral quantity-based duty as is imposed in advanced countries. The finance minister has ignored their plea.

Instead, the 2 per cent cess on customs will add to their burden, which will increase further each time crude prices go up because of the ad valorem nature of this duty.

Any reduction or rationalistaion in the customs duty on crude would have given some respite to the oil majors.

However, the government continues to see the oil companies as cash cows and is not ready to forego the easy pickings from the petroleum sector, which contributes as much as 26 per cent to the Centre’s tax collections.

The government had raised the price of liquefied petroleum gas (LPG) by Rs 20 per cylinder, and that of petrol and diesel by Rs 2 and Re 1 per litre respectively on June 15. This was expected to increase the turnover of the oil companies by 4 per cent.

Union petroleum minister Mani Shankar Aiyar had stated at the time that if the government had gone entirely on the basis of market-determined prices, the price of LPG would have to be increased by Rs 133 per cylinder, petrol by Rs 3.67 to 4.91 per litre while the price of diesel would have to be raised by Rs 1.67 to 2.35 per litre. Similarly, kerosene prices would have to be raised by Rs 4.43 per litre.

The government had borne a part of this burden by scaling down excise duties on these petroleum goods.

The excise duty on LPG was cut to 8 per cent from 16 per cent earlier, while that on petrol was reduced to 26 per cent from 30 per cent. The excise duty on diesel was scaled down to 11 per cent from 14 per cent earlier.

While he had said that a further reduction in duties “is being considered in the context of the budget”, this has not come through. Instead the 2 per cent increase in excise has neutralised part of the earlier concessions.

It now remains to be seen whether the government allows the oil companies to pass on the burden to the consumers.

With Oil and Natural Gas Corporation (ONGC) and Gail being forced to share the subsidy on LPG and kerosene, the burden on the downstream companies — Indian Oil, Hindustan Petroleum and Bharat Petroleum — will lighten.

The current indications are that Oil India Ltd (OIL), which was spared last year, will also be asked to shell out money for the subsidy in proportion to its profit.

Last year, Oil and Natural Gas Corporation had made the highest contribution of Rs 2,600 crore towards the subsidy on the two cooking fuels.

This time around, with international prices of oil hardening, the outgo will be much higher.

Clearly, the financial muscle of the public sector oil majors will continue to be used by the government both to collect taxes and hold the prices of the politically sensitive petroleum products.

Senior oil sector officials are of the view that the government should allow the companies to make market-determined profits and then take a bigger dividend to subsidise LPG and kerosene prices.

According to them, profits are the best indicators of the performance of a company and if they are eroded by ‘hidden’ subsidies, its true worth will not be reflected in the balance sheet.

This is considered important as the Indian oil companies have drawn up plans to metamorphose into global majors.

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