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Oil ministry aims for import duty cuts

The petroleum ministry aims to draw investments into refineries by proposing a cut in import duties on crude oil and a tax holiday for new projects in the forthcoming budget, officials said on Monday.

Proposals submitted to the Finance Ministry for inclusion in the budget to be announced on February 28 include a cut in import duty on crude to five per cent from 10, an official said.

The ministry has proposed cutting import duty on petroleum products to 15 per cent from 20, the official, who did not want to be named, said.

"In line with the phased decontrol plan, the ministry has asked for rationalisation of customs duty on crude oil to five per cent and on petroleum products to 15 per cent," he said.

Last September, India cut duty on crude to 10 per cent and on diesel, petrol, aviation fuel and industrial fuels to 20 per cent.

Over the past few years, India has gradually been scaling down import duty rates, which were as high as 22 per cent on crude and 32 per cent on petroleum products.

The high duty on crude was discouraging firms from setting up refineries in India. "The attempt has been to lower the duty to rates prevailing in other Asian countries."

The duty cuts are also linked to an overall lowering of protective walls that India has committed to the World Trade Organisation.

In tandem with cutting duties on raw crude, the petroleum ministry is also aiming to boost investments into the sector by seeking tax holidays for pipelines, liquefied natural gas (LNG) projects and refinery expansion projects.

At present, such tax breaks are limited to grassroots refineries, which start from scratch.

These include a duty exemption on capital goods import, allows the raising of project funds through tax-exempt bonds and a seven-year corporate tax holiday.

The ministry has recommended extension of similar benefits to refinery expansions and upgrading to provide incentives for supplying greener fuels without an increase in retail prices.

Lower customs duty on LNG and LNG projects are being sought to reduce project cost and the landed price of natural gas. This is to keep consumer prices at economic levels since it is used for power generation and fertiliser production.

The removal of a 16 per cent excise duty on LNG manufacturing and 16 per cent additional customs duty on LNG imports has also been included in the oil ministry's wish list, said the official.

The person responsible for the budget, Finance Minister Yashwant Sinha, has a tough balancing act, rationalising a complex tax system and at the same time ensuring enough revenue for a government burdened by a large fiscal deficit.

NET FOR THE POOR

The oil ministry has also discussed a two-percent surcharge on domestic and imported crude to fund a subsidy on kerosene, which is used by the poor as fuel for cooking and lighting.

Along with a proposed increase in the price of cooking gas, the surcharge could provide money to clear the deficit during the coming fiscal year (April-March), he said.

The Oil Ministry operates and manages oil pool accounts, a complex cross-subsidy scheme used to compensate oil firms to sell kerosene and cooking gas (LPG) at below cost.

"The attempt is to generate a surplus in the oil pool account before it is dismantled and the sector is fully decontrolled in 2002," said the official.

The deficit, the money owed to refiners and marketing firms, is estimated to touch 120 billion rupees ($2.6 billion) when the fiscal year closes on March 31, 2001.

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