The government may levy a cess on income tax and corporate tax to part-fund the oil subsidy bill which is projected to balloon to Rs 235,000 crore this year, three times what it was last year, due to rising oil prices.

This would be part of a multi-pronged package to provide relief to the cash-strapped oil companies, which would also include a hike in the price of petrol and diesel, a reduction in customs and excise duties as well as an issue of oil bonds by the government.

Petroleum Minister met Finance Minister P Chidambaram early Tuesday to discuss the relief package for the three oil marketing companies Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum who sell petrol, diesel, LPG and Kerosene at subsidised prices.

The cess was one of the proposals discussed. "We discussed various options but nothing has been decided," Deora said after the meeting.

Oil company officials say that a decision needs to be taken fast to avoid the possibility of pumps running dry. "We don't want to see scarcity of petroleum products, particularly kerosene and LPG," said Deora, adding that the attempt is to resolve the issue as soon as possible. A decision could be finalised in about a week's time.

A cess of 1 per cent would yield a revenue of about Rs 3,000 crore. This would be used to compensate the finance ministry for revenue lost on account of the proposed duty cuts. "The amount of duty cuts would decide the extent of the retail price hike required," said a senior oil ministry official.

The government wants to limit the price hike to the minimum possible, as it is a politically unpopular move which is also opposed by the communist parties who are supporting the ruling coalition. A hike would also stoke inflation, which is already nearing 8 per cent much higher than the RBI target of 5.5 per cent.

The possibility of a relief package being finalised soon saw a spurt in the share prices of the three marketing companies. Indian Oil Corporation the largest marketer was up 1.65 per cent at Rs 421.55 at the Bombay Stock Exchange on Tuesday, when the overall Sensex was down 0.45 per cent at 16,276 and the oil and gas index was also down 1.04 per cent. Hindustan Petroleum was up 2.49 per cent at Rs 246.55 while Bharat Petroleum was up 0.04 per cent at Rs 349.