The oil and gas sector was banking on Budget 2010-11 to deliver a pretty long wish list. But when the FM finally delivered his speech, it was a rare display of fiscal prudence. He kept in line with the recommendations of the 13th Finance Commission, even against the challenging backdrop of recessionary hangovers coupled with spiralling food inflation.
The Budget saw customs duty of 5% restored on crude petroleum and excise duty on both petrol and diesel increased by Re 1 per litre. As a result of this measure, petrol prices will rise by Rs 2.71 per litre and diesel by nearly the same amount, considering Delhi as the benchmark. Predictably, this measure did not win kudos from the Opposition, which staged a dramatic walkout when it was announced. The Opposition says it is worried about the potential impact that increased duties on petroleum products will have on inflation in general. The oil and gas industry, however, appears to have mixed feelings about the entire gamut of measures that have been proposed in this Budget.
The issue of rationalisation of excise duties on petroleum products (especially petrol and diesel) needs to be put in perspective. We must see them in the light of this Budget, but also historically. In line with the recommendations of a number of government committees that have deliberated the rationalisation of duties on petrol and diesel from time to time, the government has been reducing excise duties in a progressive manner on branded petrol and diesel. It reduced the excise duty from 30% and 14% respectively (that existed till February 2005) to Rs 6.5 per litre and Rs 2.75 per litre respectively from July 2009. This progressive but major rationalisation from ad valorem to a specific structure should be commended even at the first instance. After all, it has already proved successful in weeding out a chunk of cascading effect from the tax structure itself. In this light, the increase of excise duty on petrol and diesel to Re 1 per litre and its potential cascading effect is insignificant. It also needs to be kept in mind that the lion’s share of the distortions in petrol and diesel prices comes from state level irrecoverable duties (like octroi, entry taxes and transit taxes). These are mostly ad valorem and need to be rationalised at the first instance in order to minimise the cascading effect.The question is whether the Budget’s moves imply that the government is getting ready to announce further reforms in the oil sector. It needs to be mentioned at the outset that any increase in excise or customs duties goes straight to the government coffers as additional revenue. Thus, the rise in fuel prices that results from this increase in duties does not directly benefit the public sector oil companies, which are facing mounting under recoveries. However, the corollaries that the FM came out with in this Budget—in terms of pegging subsidy on petroleum products to Rs 3,108 crore in the next fiscal compared to a figure of Rs 14,954 crore this fiscal—does have the whiff of progressive reforms.
The government has also decided to compensate oil companies in cash terms rather than by issuing oil bonds with debt implications. The cash compensation has been fixed at Rs 12,000 crore for the three public sector oil marketing companies for this fiscal against their demand of Rs 31,000 crore merely on account of cooking fuel. All these measures suggest a movement towards deregulation and freeing of pump prices of petrol and diesel in line with the Parikh Committee’s recommendations, the implementation of which now seems imminent and inevitable. But with the Opposition already staging a walkout on changes in excise duties, one has to consider that reforms may attract a strong political backlash. The FM, however, in his Budget speech has relegated that responsibility to the petroleum ministry, although it is common knowledge that decisions would be taken in consensus.
The restoration of the basic customs duty on crude to 5% will have positive implications for upstream oil producers like ONGC and OIL as it enhances the protection of indigenous crude. However, the implication for down-stream refiners would be negative for the obvious reason of increase in prices of procured crude.
One of the measures, however, that has not gone down well with the industry is the increase of Minimum Alternate Tax (MAT) from 15% to 18%. Given the fact that GDP received a much-needed boost in 2009-10 from the KG basin and that Cairn Energy has commenced crude production in Rajasthan, the business of oil and natural gas exploration and production was actually seeking more fiscal incentives. This would have helped them take more risk in untapped areas. One incentive that the industry had hoped for was exemption from MAT provisions. However no such exemption has been granted on profits derived from commercial production or refining of mineral oil—which are otherwise fully exempted from payment of income tax for a period of seven years (usually referred to as tax holiday).
The measures suggested in Budget 2010-11 do hint at imminent reforms. It is also extremely important to understand that there could be no better time to reform the oil sector than now, as the economy is recovering and the international crude market is much less volatile. In this light, the argument for universal insulation of auto fuel prices—primarily used by the more affluent—is also on very weak ground. Withdrawal of such insulation will, after all, be the first step towards inculcating conservation habits and encouraging energy security. From this perspective, the marginal increase in excise duty is just the tip of an ice-berg as far as necessary measures are concerned.
Source: Financial Express
The Budget saw customs duty of 5% restored on crude petroleum and excise duty on both petrol and diesel increased by Re 1 per litre. As a result of this measure, petrol prices will rise by Rs 2.71 per litre and diesel by nearly the same amount, considering Delhi as the benchmark. Predictably, this measure did not win kudos from the Opposition, which staged a dramatic walkout when it was announced. The Opposition says it is worried about the potential impact that increased duties on petroleum products will have on inflation in general. The oil and gas industry, however, appears to have mixed feelings about the entire gamut of measures that have been proposed in this Budget.
The issue of rationalisation of excise duties on petroleum products (especially petrol and diesel) needs to be put in perspective. We must see them in the light of this Budget, but also historically. In line with the recommendations of a number of government committees that have deliberated the rationalisation of duties on petrol and diesel from time to time, the government has been reducing excise duties in a progressive manner on branded petrol and diesel. It reduced the excise duty from 30% and 14% respectively (that existed till February 2005) to Rs 6.5 per litre and Rs 2.75 per litre respectively from July 2009. This progressive but major rationalisation from ad valorem to a specific structure should be commended even at the first instance. After all, it has already proved successful in weeding out a chunk of cascading effect from the tax structure itself. In this light, the increase of excise duty on petrol and diesel to Re 1 per litre and its potential cascading effect is insignificant. It also needs to be kept in mind that the lion’s share of the distortions in petrol and diesel prices comes from state level irrecoverable duties (like octroi, entry taxes and transit taxes). These are mostly ad valorem and need to be rationalised at the first instance in order to minimise the cascading effect.The question is whether the Budget’s moves imply that the government is getting ready to announce further reforms in the oil sector. It needs to be mentioned at the outset that any increase in excise or customs duties goes straight to the government coffers as additional revenue. Thus, the rise in fuel prices that results from this increase in duties does not directly benefit the public sector oil companies, which are facing mounting under recoveries. However, the corollaries that the FM came out with in this Budget—in terms of pegging subsidy on petroleum products to Rs 3,108 crore in the next fiscal compared to a figure of Rs 14,954 crore this fiscal—does have the whiff of progressive reforms.
The government has also decided to compensate oil companies in cash terms rather than by issuing oil bonds with debt implications. The cash compensation has been fixed at Rs 12,000 crore for the three public sector oil marketing companies for this fiscal against their demand of Rs 31,000 crore merely on account of cooking fuel. All these measures suggest a movement towards deregulation and freeing of pump prices of petrol and diesel in line with the Parikh Committee’s recommendations, the implementation of which now seems imminent and inevitable. But with the Opposition already staging a walkout on changes in excise duties, one has to consider that reforms may attract a strong political backlash. The FM, however, in his Budget speech has relegated that responsibility to the petroleum ministry, although it is common knowledge that decisions would be taken in consensus.
The restoration of the basic customs duty on crude to 5% will have positive implications for upstream oil producers like ONGC and OIL as it enhances the protection of indigenous crude. However, the implication for down-stream refiners would be negative for the obvious reason of increase in prices of procured crude.
One of the measures, however, that has not gone down well with the industry is the increase of Minimum Alternate Tax (MAT) from 15% to 18%. Given the fact that GDP received a much-needed boost in 2009-10 from the KG basin and that Cairn Energy has commenced crude production in Rajasthan, the business of oil and natural gas exploration and production was actually seeking more fiscal incentives. This would have helped them take more risk in untapped areas. One incentive that the industry had hoped for was exemption from MAT provisions. However no such exemption has been granted on profits derived from commercial production or refining of mineral oil—which are otherwise fully exempted from payment of income tax for a period of seven years (usually referred to as tax holiday).
The measures suggested in Budget 2010-11 do hint at imminent reforms. It is also extremely important to understand that there could be no better time to reform the oil sector than now, as the economy is recovering and the international crude market is much less volatile. In this light, the argument for universal insulation of auto fuel prices—primarily used by the more affluent—is also on very weak ground. Withdrawal of such insulation will, after all, be the first step towards inculcating conservation habits and encouraging energy security. From this perspective, the marginal increase in excise duty is just the tip of an ice-berg as far as necessary measures are concerned.
Source: Financial Express
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