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Govt panel for slashing customs duty on imported LNG to zero
September, 19th 2011

A high-level government panel has called for slashing customs duty on imported liquefied natural gas (LNG) to zero, instead of cross-subsidising the high-priced imported fuel by making domestic natural gas users pay more.

An inter-ministerial committee headed by Planning Commission Member Saumitra Chaudhuri, in its final report, has recommended that the import duty on liquefied natural gas (LNG) should be aligned with that of crude oil, on which customs duty was brought down to zero from 5 per cent in June.

Also, the government should treat LNG/natural gas as a "declared good", so that they have a common concessional rate of VAT.

"The Department of Revenue (which was also part of the committee) has not agreed to the proposal for aligning import duty on LNG with that of crude. On the issue of declared good status in regard of VAT, the Department of Revenue did not wish to record a view," the report noted.

The panel, which in its draft report a few months back had suggested averaging out the price of costlier imported LNG with cheaper domestic gas, did a complete u-turn in its final report by saying the proposal was not feasible.

The averaging out of prices, called "pooling", would have resulted in users of cheaper domestic natural gas paying double the existing rates so that imported LNG could be sold at an equal rate.

"The committee does not recommend a pooling mechanism for natural gas at the overall level, nor does it recommend price pooling on a sectoral basis," it said.

Instead, the committee said in its August 25 report that preferential allotment of domestic gas should be done to the priority fertiliser and power sectors only and other consumers like steel plants should be allocated imported LNG.

Domestic gas is currently priced at USD 4.2 to USD 5.5 per million British thermal units (mmBtu), while the fuel imported via ships in its liquid form (liquefied natural gas, or LNG) is priced at USD 10 to 14 per mmBtu.

"These (non-priority) users operate in a market environment where their output prices are market-driven, with no regulatory burden, and hence, they should be able to pass on the higher costs of gas feedstock," the report said.

State-run gas distribution major GAIL India and Petronet LNG, which were part of the inter-ministerial committee, have been lobbying for pooling of gas prices, as LNG currently being imported under a long-term contract from Qatar will cost upward of USD 12 per mmBtu from 2014, while supplies under a new contract with Australia were priced at USD 14.5 per mmBtu.

"The recommendation put forth here does not envisage any form of pooling at the all-India level, cutting across industries," the report said.

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