Taxing Times

New Delhi, Jan. 15: Indian Oil Corporation has sought the initiation of the tax holiday for its upcoming refinery at Paradip in Odisha from 2013-14.

At present, a seven-year tax holiday is available to units that are commissioned by March 31, 2012, under section 80IB (9) of the Income Tax Act (exemption from payment of tax on income earned from refining).

Indian Oil’s Paradip refinery is likely to miss out on the tax holiday because of the delay in commissioning the project before the end of this fiscal. The absence of the tax benefit is likely to impact the PSU’s profitability and rate of return on capital.

Senior company officials said they had asked the oil ministry to request the finance ministry in the budget discussions to initiate the tax holiday from fiscal 2013-14.

Oil ministry officials said owing to issues beyond its control, IOC had not been able to commission its Rs 29,777-crore refinery in Odisha. The officials said they would speak on the issue with the finance ministry.

“If any project misses tax holiday and that too for seven years, it would impact the profitability of the refiner. Return on investment would actually fall, as part of revenues would go for paying tax beginning from the commissioning of the refinery,” energy analyst Kalpana Jain of Deloitte Touche Tohmatsu India said.

Law and order problems and issues related to land acquisition have delayed the 15-million-tonnes-a-year commissioning of the refinery to September 2013 from the previous schedule of the first quarter of 2012.

Company officials said if the tax holiday was not extended, the rate of return on capital invested in the refinery-cum-petrochemical plant would be lower by 1.5-2 per cent.

They said the project had achieved 70 per cent overall physical progress, 98 per cent engineering progress and 45 per cent construction progress. Of the project cost of Rs 29,777 crore, commitment of Rs 28,150 crore has been made and an expenditure of Rs 11,436 crore incurred.

The Paradip refinery will produce 5.97 million tonnes (mt) of diesel, 3.4mt of petrol, 1.45 MT of kerosene/ATF, 536,000 tonnes of LPG, 124,000 tonnes of naphtha and 335,000 tonnes of sulphur — all for sale in the domestic market.

The refinery is being configured to process the toughest, heaviest and dirtiest crude, which are cheaper than the cleaner and more easily processed varieties.

Dip in profitability will add extra burden to IOC’s balance sheet that is already bleeding because of high under-recoveries.

Last year, the three state-owned oil firms — IOC, Bharat Petroleum and Hindustan Petroleum — together had an under-recovery of Rs 78,190 crore while this year, IOC alone has an under-recovery of over Rs 73,000 crore. The three firms together are projected to lose Rs 137,605 crore in the 2011-12 fiscal.