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Tax relief likely for oil companies
February, 26th 2007

Oil companies, who have often paid the cost of political whims on retail fuel pricing, may be in for some cheer this Budget. Forced to slash retail fuel prices barely days before the Budget in a bid to taper the surging inflation, finance minister P Chidambaram may cut excise and customs duties on fuels to help oilcos check losses.

Retail fuel prices in India have always been used as a political tool to appease the vote bank. Reduction in retail fuel prices have, therefore, got more to do with the political climate than the global crude oil prices.

The recent reduction in prices of petrol and diesel is no different. Although there has been a softening in global crude prices, the decision to reduce fuel prices has more to do with politics than economics. The rising inflation, which was at a two-year high even a week back, has become a major point of worry for the government. Slashing retail fuel prices was one of the obvious tools available to the government. But this time around, oilcos may be in for a respite.

The proposed cut in duties, which are in line with the reform process in the sector, is expected to translate into a significant drop in revenues for the exchequer. The petroleum sector accounts for almost 25% of total revenues and any cut in advalorem rates would have a sizeable impact on revenues.

The governments compulsion to slash fuel prices to lower inflation is, perhaps, the trigger for the proposal to reduce duties. Oilcos are estimated to have an under-recovery of almost Rs 50,000 crore this year. Of this, the government is expected to bear a part of the burden by doling out bonds of around Rs 20,000 crore. The balance would have to be absorbed as discounts by upstream oilcos and losses by downstream OMCs.

The government, which has resorted to oil bonds for the last three years, has taken on a major non-Budget exposure which will have to be met by consequent governments when the bonds are redeemed.

The non-transparency method applied by the government to subsidise consumers has come under criticism from several quarters. Reduction of levies will help reduce losses for the oilcos. A reduction in customs duties will also bring down protection levels and force Indian firms to be more competitive.

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