Duty cut on crude oil and petroleum products

New Delhi: As crude oil prices climbed to a two-and-half year high of USD 108 per barrel, the Petroleum Ministry is pinning hopes on customs and excise duty cut in the Union Budget to avoid hiking petrol and diesel prices.

"The spurt in international oil prices following crisis in Libya has meant that the difference between domestic retail selling price and the imported cost widens. This situation is not sustainable," an oil ministry official said.

The basket of crude oil India buys on Tuesday touched USD 105.05 per barrel, necessitating a hike in fuel prices.

"With Parliament in session, I dont see it will be possible to even raise price of petrol, which had been freed from government control in June last year," the official said.

"Also, there are concerns of the inflationary impact of the hike in prices particularly of diesel on food prices", the official said.

Petrol, whose prices were last raised by Rs 2.50 a litre in January, is being sold at a discount of Rs 2.50-2.75 a litre to its imported cost.

On diesel, state-owned Indian Oil Corp, Bharat Petroleum and Hindustan Petroleum lose Rs 10.74 a litre. Besides, they lose Rs 21.60 per litre on kerosene and Rs 356.07 per 14.2-kg domestic LPG cylinder.

The three firms are currently losing Rs 430 crore per day and at current rates are projected to end the fiscal with Rs 76,559 crore revenue loss.

"If prices cannot be raised, the next best option to limit the impact of rising international oil prices is to reduce duties," the official said.

The ministry is hoping Finance Minister Pranab Mukherjee in his Budget for 2010-11, to be presented on Monday, will abolish customs duty on crude oil and cut excise on petrol and diesel to avoid a further increase in retail prices.

It wants customs or import duty on crude oil to be reduced to zero from 5 per cent at present.

Also it wants the customs duty on diesel slashed to 2.5 per cent from 7.5 per cent at present, along with a reduction in the specific excise duty imposed on the most-consumed fuel in the country.

"Eliminating customs duty on crude and correspondingly bringing down duty on finished products would reduce the under-recoveries (revenue loss on selling fuel below cost) that are compensated by the government," he said.

"Instead of collecting customs duty on crude and later refunding the same as under-recovery compensation, the government may eliminate the duty on crude as was done earlier," he said.

The average price of crude oil during 2008-09 was around USD 82 per barrel, when the duty on crude oil was reduced to zero. The average price of crude oil during 2010-11 has already crossed USD 82 per barrel and may increase further.

The abolition of customs duty on crude oil would reduce diesel under-recovery by Rs 1.48 per litre.

Although the gross impact of reduction of crude duty would be Rs 15,880 crore, the net impact on the Budget would be limited to Rs 5,212 crore.

This is after taking into account compensation for under-recoveries of IOC, BPC and HPC to the tune of Rs 10,668 crore in a full year.

The oil ministry is hoping that Mukherjee would reduce specific excise duty of Rs 2.60 per litre on diesel and Rs 12.35 a litre basic and additional excise duty on petrol, the official said.