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Govt may levy cess to bail out oil firms
May, 28th 2008

A cess or surcharge on income tax and corporate tax may be levied to bail out oil firms reeling under high global oil prices as Petroleum Ministry's proposal to raise petrol price by Rs 10 a litre, diesel by Rs 5 per litre and that of LPG by Rs 50 per cylinder finds few takers.

The new proposal follows Finance Minister P Chidambaram's reluctance to cut duties on crude oil and petroleum products unless alternate source of revenues are identified.

Petroleum Minister Murli Deora met Chidambaram on Tuesday but failed to convince him of the urgency to cut import and excise duties to avoid the Rs 2,00,000 crore revenue loss expected on petrol, diesel, domestic LPG and kerosene this fiscal.

BPCL and HPCL have cash to buy crude oil only till July while Indian Oil can finance imports till September. The three firms face huge liquidity crisis as they are unable to realise full value of products sold.

"We don't want to see scarcity of petroleum products particularly kerosene and LPG," Deora told reporters after the meeting. "Oil companies are in a precarious state and we need urgently find solutions."

Deora said some proposals were discussed but "nothing has been agreed."

Sources said a cess or surcharge like the one levied after the Kargil war, may be imposed on income and corporate tax to make up for the cut in customs duty on crude oil to zero from 5 per cent and an excise duty cut on petrol and diesel.

Petroleum Ministry is proposing to raise petrol price by Rs 10 a litre, diesel by Rs 5 per litre and that of LPG by Rs 50 per cylinder cut the Rs 580 crore per day loss made by the three oil firms by one-third.

S Sundereshan, Additional Secretary in Petroleum Ministry said oil companies cannot wait for another week for the decision.

"We are hopeful that a decision will be taken soon," he said. "The crisis needs to be defused at the earliest."

Deora said some in the government want petrol prices to be deregulated, a move that may see rates being hiked by Rs 16-17 a litre, but continue subsidies on diesel.

Petrol contributes has negligible weightage in inflation and so its deregulated prices moving in tandem with global prices will not lead to price hike. Diesel, on the other hand, is used by transport industry and replicating the same for the fuel would have cascading effect on inflation.

Sources said Petroleum Ministry sought lowering of customs duty on crude oil to zero from 5 per cent and that on petrol and diesel to 2.5 per cent from current 7.5 per cent.

It also wanted excise duty cut on the two fuels but Finance Ministry is not obliging.

The Petroleum Ministry is not in favour of compensating Indian Oil, Bharat Petroleum and Hindustan Petroleum beyond one-third of the total under-realisation on fuel sales.

It is also for limiting the burden on upstream firms like ONGC at 33 per cent as had been in the previous year and wanted the rest of the revenue loss to be met through either price increase or duty rejig, sources said.

Currently, the government meets a little over half of the under-realisation through oil bonds. Retailers do not favour oil bonds as they do not provide the liquidity needed to run operations.

A Re 1 a litre hike in petrol price would give oil firms Rs 90 crore a month more revenue while the same quantum in diesel prices would result in Rs 360 crore revenue a month.

A Rs 10 per cylinder hike in LPG prices would fetch oil firms Rs 58 crore per month.

A Re 1 per litre cut in excise duty on petrol would result in government foregoing Rs 1,380 crore revenue annually and the same on diesel would result in Rs 5,270 crore revenue foregone per year.

Crude oil currently attracts an import duty of 5 per cent and if this is eliminated it will help lower the Rs 2,72,699 crore oil import bill of 2007-08. Customs duty is levied on petrol and diesel at the rate of 7.5 per cent and its reduction would help oil companies cover some of their losses.

Petrol currently attracts Rs 14.35 a litre excise duty and diesel Rs 4.60 per litre rate.

IOC, BPCL and HPCL, at present, are losing Rs 16.34 a litre on petrol, Rs 23.49 per litre on diesel, Rs 305.90 per LPG cylinder and Rs 28.72 per litre on kerosene.

The three firms are faced with a huge liquidity crunch and are borrowing Rs 3,500 crore a month to meet day-to-day expenditure. With borrowings touching Rs 65,000 crore, the companies are now talking to banks to raise borrowing limit, the official added.

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