Duty restructure hits refineries
Guwahati, Sept. 1: Profitability of refineries in the Northeast, which has always been under strain, will be badly hit because of restructuring of duties by the Centre.
The ministry of petroleum and natural gas had carried out duty restructuring in the wake of high crude prices and mounting under recoveries of oil marketing companies.
The duty restructuring led to reduction in customs duty on crude oil from five per cent to nil, motor spirit/high speed diesel from 7.5 per cent to 2.5 per cent and excise duties on high speed diesel (HSD) from Rs 4.60 per litre to Rs 2.
Sources said while these would prove helpful in cash flow management of oil marketing companies and in mitigating the subsidy burden of upstream companies, this would have a negative impact on the already strained profitability of the refineries in the region.
There are four refineries in Assam — Guwahati, Bongaigaon, Digboi and Numaligarh. The adverse impact because of restructuring of duties will be to the tune of Rs 1,900 crore.
The reduction of customs duty on crude oil does not bring any benefit to North East refineries as these are processing indigenous crude oils. In fact with this change, Northeast refineries are now at a disadvantageous position vis-à-vis refineries processing imported crude oil as N-E refineries are required to pay VAT at five per cent and entry tax at two per cent. Refineries processing imported crude oil do not have to pay anything as the incidence of customs duty/sales tax for them is nil now.
In fact the reduction in excise duties on HSD from Rs 4.60 per litre to Rs 2 per litre has resulted in huge decline in realisation to refineries because of reduction in the region excise duty benefit.
The Centre provides 50 per cent excise duty concession in view of the sub-economic size and geographically disadvantageous location. Because of decline in excise duties, these refineries stand to lose this benefit.
In addition to these, enhancement in VAT rate from four to five per cent on crude oil by the state government and revision in pipeline charges by OIL for Barauni-Bongaigaon section have adversely affected the refineries of the region.
The Parliamentary Standing Committee on Petroleum and Natural Gas, in its latest report, has noted with concern the financial health of oil refineries in the region because of various problems, including entry tax on crude oil being charged by the state governments, which is affecting the profitability of the refineries. In fact, the director (refineries) of Indian Oil Corporation Limited, B.N. Bankapur, has written to the ministry saying that all the three refineries of IOCL would end up in the red.
“This is an undesirable situation from the point of aspirations of the employees, ancillary industries and regional development. While there have been plans to improve the profitability of the N-E refineries with setting up of facilities, the same will now be uneconomical,” he said.
The IOCL has requested the ministry to request Assam to waive VAT and entry on crude oil. Till that happens, it has asked the ministry to withdraw the instructions. It has requested the finance ministry to enhance Northeast excise duty concession from 50 to 100 per cent.
The general secretary of North Eastern Region Oil Worker’s Co-ordination Committee, Biren Kalita, has called for reduction in VAT and waiving of entry tax to help the refineries remain viable.
The reduction in customs duty has resulted in entitlement of lower refinery transfer price to these refineries. The refinery transfer price (RTP) is the price at which oil marketing companies (OMCs) lift products from the refineries.
The NEROWCC has also asked the Centre to expand the capacity of the four N-E refineries to make it economically viable.
The issue figured in Parliament a few days back when minister of state for petroleum and natural gas R.P.N. Singh in a written reply in the Rajya Sabha had said the Northeast refineries have implemented a number of projects for their modernisation, quality upgrade and efficiency.
These projects will improve the efficiency and thereby the profitability of the refineries, he said.