MUMBAI, March 30: With deregulation of the petroleum sector all set to kick off on Wednesday, public sector oil companies find themselves on a rather sticky wicket. The main obstacle is the current import duty structure, where some petro-products have lower duties than crude. In this lopsided structure, petroleum refining companies could face huge losses in a deregulated scenario.Thus far, no solution has been coming from the government to correct this anomaly in the duty structure as any move to lower customs duty on crude would mean loss of revenue. Yet, if the level persists, the oil companies may have to incur huge losses which could be impossible to sustain in the medium term.
The reforms in the oil sector have been based on the recommendations by the expert technical group led by Nirmal Singh, joint secretary in the ministry of petroleum and natural gas. As per the schedule, import duty on crude was to be lowered to 20 per cent in the first phase, then to 15 per cent and ten per cent before comingdown to nil by the fourth phase.
Likewise, in the case of high speed diesel, the duty was to reduce from the existing 32 per cent to 25 per cent and finally to 15 per cent. In the case of motor spirit (MS), bitumen and aviation turbine fuel (ATF), the import duty was to have been reduced from the present 32 per cent to 30 per cent in the first phase and to 15 per cent by 2002.
The committee had sugested lowering import duty on furnace oil (FO) from 32 per cent to 25 per cent in the first phase to a final level of ten per cent by 2002. The group had suggested imposition of a five per cent import duty on naphtha in the first phase to stay at the same level thereafter.The products which will be decontrolled in the first phase are naphtha, FO, LSHS (low sulphur heavy stock), bitumen and paraffin wax. Kerosene, HSD (high speed diesel), ATF and MS would continue to be controlled during this period. Eventually by 2002, the petroleum sector will be completely free of all controls and will operate on amarket-determined pricing mechanism.The recommended duty changes are still to take place thanks to the recent bout of political uncertainty. Sources at the petroleum ministry said that the oil companies would have a hard time trying to keep themselves in a comfortable position till the changes are made. While accurate calculations are yet to be worked out, rough estimates show that IOC, being the largest refining company, may incur losses of over Rs 200 crore as also BPCL and HPCL, though with comparatively lower figures.
The three companies, in particular, are believed to have put their case very strongly with the petroleum and finance ministries. However, it is unlikely that any immediate rectification will take place as it would affect revenue collections. The petroleum ministry can do little except to bear the difference in the duty structure from the pool account, sources said.The issue could have grave implications for the oil sector as companies cannot afford to kick off the process of deregulationwith the threat of losses looming large. As it is, the move from administered to market-driven pricing is a novel experience for the oil PSUs. To be able to counter this, BPCL, HPCL, IOC and IBP have joined hands to pool their efforts in marketing petro-products from all units, including stand-alone refining companies. The present duty structure has come in for some criticism from the R-group report on restructuring the oil sector. It was mentioned that the current tariff rates contradict the rational tariff structure of keeping import duty on raw materials lower than that on final products.
"Such a duty structure is somewhat perverse in the sense that it provides a negative rate of protection to refining sector PSUs while giving a high rate of effective protection to private sector petrochemical companies."The R-group stated in its report that a clear example of this practice is naphtha. The present duty structure, it added, favours imports, discriminates against even efficient indigenous producers and isnot attractive to those who wish to invest in the refinery sector. "In view of the decanalisation of naphtha, the petrochemical industries are taking advantage of the nil import duty on naphtha and other benefits on sales tax and are importing large quantities of naphtha resulting in infructuous foreign exchange drainage, financial loss to the oil companies, and an unnecessary burden on the already congested port facilities; in other words, the social costs are considerably higher than the private costs," the R-group report said.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
