RIL may have to reverse part of Rs 770 cr credit

Central sales tax incentive slashed in revised estimates for 2003-04.

Reliance Industries Ltd may have to reverse a part of an estimated Rs 770 crore of sales tax incentives that it took credit for in its annual accounts for 2003-04, if the Union government sticks to the decision to slash its 2003-04 budgetary provision made for compensation of irrecoverable taxes to oil refineries.

According to analysts, the company booked a total sales tax benefit of Rs 770 crore for 2003-04, a part of which is the central sales tax benefit.

This is because Reliance sells nearly 85 per cent of its output in states other than Gujarat (where its refinery is located) to which the 4 per cent central sales tax is applicable.

But the Union government's revised estimates for 2003-04 showed that the provision for compensation of irrecoverable taxes to oil refineries had declined to Rs 201 crore from the budget estimate of Rs 1,570 crore presented earlier.

For 2004-05 also, the interim Budget of February 3 made no provision under this head on the assumption that there would be no extension of its policy of reimbursing central sales tax to the refineries.

A Reliance spokesperson, when contacted, said "Sales tax incentives comprises two parts""local sales tax and central sales tax. The Budget provision pertains only to central sales tax. Even here, it is only an interim Budget and it is not yet approved. We have yet to hear anything on this from the ministry of petroleum and natural gas. We, therefore, continue to treat this in the same manner as we have been doing it in the past."

The total Rs 770 crore sales tax benefits accounted for 22 per cent of refining EBITDA (earnings before interest, tax, depreciation and amortisation) and 15 per cent of the net profits of Rs 5,160 crore for 2003-04. For the fourth quarter alone, the company accounted for a sales tax benefit of Rs 220 crore, company sources said.

As an independent refinery, Reliance's sales to the public sector marketing companies were treated as central sales as part of the overall administered pricing mechanism (APM) that prevailed till April 2002. Such independent refineries were given a two-year transition period after the administered pricing was dismantled.

Industry sources say the central government is under no obligation to pay the said amount as it has made no commitment.

"The reimbursement was part of the various incentives provided to oil companies under the administered pricing mechanism, which prevailed till 2002. Till then, oil companies operated under a regulated environment with a certain assured return on their assets. However, now that the administered pricing mechanism has been dismantled, the central government is under no obligation to compensate for the central sales tax loss incurred by oil companies," said an industry source.

The Union government's decision to do away with the central sales tax benefit will affect all independent refiners like Chennai Petroleum, Kochi Refineries, Bongaingaon Refineries and Mangalore Refineries to the extent that they sell outside the state in which they produce and have been claiming central sales tax credit.

Also, some sources say since the interim Budget did not provide for the sales tax reimbursement to refiners, most independent refiners are not taking credit for it. However, this cannot be confirmed as the companies are yet to declare their results for the final quarter.

The snapshot

• Reliance took credit for Rs 770 crore sales tax incentives in its annual accounts for 2003-04. A part of this is the central sales tax benefit.
• The company sells nearly 85% of its output in states other than Gujarat to which the 4 per cent central sales tax rate is applicable.
• The government's revised estimates for 2003-04 slashed the provision for compensation of irrecoverable taxes to oil refineries.