Calcutta, Nov. 22: The Narendra Modi-led cabinet will take the final decision on the tax relief worth Rs 2,277.18 crore sought by the Mamata Banerjee government for beleaguered Haldia Petrochemicals Ltd (HPL).

An inter-ministerial group, which dealt with the matter, has recommended that the HPL case be put up before the cabinet as it could not take a decision because of the unprecedented nature of the relaxation being sought for Bengal's showcase project.

The group that met on October 6 has accepted that HPL will neither have to pay the principal tax nor the interest in cash. Instead, the company will get four years for tax compliance as it had requested.

The issue pertains to the duty-free import of various items, especially the main raw material naphtha, by HPL on the condition that the company would export the finished product within a specified time.

HPL could not fulfil the export obligation owing to poor financial health and sold the product in the domestic market where profit margin was higher.

Calcutta Customs had slapped a notice on HPL in February to recover the duty. As on August 31, 2015, the liability includes Rs 224.64 crore of basic customs duty, Rs 1,150.28 crore of additional duty and an interest of Rs 902.26 crore.

However, the Bengal government has repeatedly pleaded with the finance ministry to grant more time to HPL to meet the export obligation. The state government said there was substantial public interest involved in HPL not only by way of investment through equity (40 per cent), preference shares and unsecured loans but also because it provides employment to 2 lakh people in the polymer downstream sector.

Moreover, public sector financial institutions such as the State Bank of India and IDBI have an exposure of Rs 5,135 crore in HPL and their finances are at risk if the company is made to pay the duty. The RBI has also accorded a special dispensation to restructure the company's loans.

In the October meeting, which was attended by officials from the ministries of commerce, finance (department of revenue), chemicals and petrochemicals, HPL and the Bengal government, it was decided that the company would get an extension and not pay the penalty provided it accepted certain conditions.

To begin with, HPL will not be allowed to use duty-free imported naphtha to meet the pending export obligation. The company will have to procure naphtha from domestic sources or pay duty if it imports the item.

Moreover, the HPL board has to pass a resolution agreeing to this condition. This is necessary because the nature of HPL as a public sector unit will change after the Bengal government sells part of its stake in HPL to private promoter The Chatterjee Group (TCG) for Rs 653 crore. This was one of the important planks used by the Mamata government to seek the relief.

HPL has tied up with Indian Oil Corporation to source 35,000 tonnes of naphtha from IOC's Haldia refinery to comply with the export obligation.

The good news for HPL is that petrochemical margins are buoyant in all markets and it will not have any trouble in exporting. In the last 6-7 months, the company's EBIDTA (earnings before interest, taxes, depreciation and amortisation) has touched around Rs 1,000 crore, indicating a robust performance. The plant is also operating at 95 per cent of its capacity.

All eyes will now be on the political equation between the Trinamul Congress and the NDA government in the upcoming winter session of Parliament. Recently, Bengal finance minister Amit Mitra had clarified the party's stance on economic issues such as the goods and services tax (GST) bill by saying it would support the NDA on the floor of the House.

The BJP-led government needs the help of Trinamul MPs in the Rajya Sabha where it does not have a majority. Moreover, political pundits do not see any prospect for the BJP in the next year's Assembly poll in Bengal. Therefore, the BJP is likely to be more amenable to the state government's demands.

Once the tax breather is formally in place, it will set off another round of loan and share restructuring in HPL. Lenders to the petrochemical unit have agreed to offer a fresh package to alleviate the firm's debt pile. It may include a reduction in interest rate, increase in loan tenure and fresh loans.

However, the corporate debt restructuring will be effective only after the West Bengal Industrial Development Corporation, a state government entity, sells its stake in HPL to TCG and brings a decade-old squabble between the owners to an end.

The share transfer, in turn, will take place after a successful resolution of the tax issue. The cash-strapped Bengal government stands to gain Rs 653 crore from the first phase of stake sale to TCG.

Bengal government has agreed to sell part of its stake in HPL to private promoter The Chatterjee Group (TCG) for Rs 653 crore. One of the important planks used by the Mamata government to seek the relief is that the nature of HPL as a public sector unit would change after the share transfer, which has been passed by the company's board through a circular resolution.