The 2002-03 Union budget proposals are largely expected to improve the bottomline of the downstream petroleum refining and marketing companies. However, the Numaligarh Refinery Limited (NRL) in the Northeast is an exception, which will lose around Rs 250-300 crore every year because it will no longer enjoy 100 per cent duty exemption on its products.
The refining sector will get the biggest boost from the increase in Customs duty on kerosene to be sold through the public distribution system (PDS) from 5 per cent to 10 per cent. This will increase the issue price of PDS kerosene from refinery by 5 per cent. Since all the refineries also produce kerosene, this benefit will accrue to all of them uniformly.
"This is one major proposal in the budget in favour of refining companies. It will improve the refining margins which have been coming under increasing pressure of lately," says P Sugavnam, finance director of the Indian Oil Corporation. "The other factor in favour of the refining sector will be the removal of all negative duties, barring naphtha for fertiliser use which will continue to attract zero duty," he said
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However, S Madhavan, partner and head (indirect taxes) of PricewaterhouseCoopers, is more cautious: "There will be winners and losers. It will all depend upon their effective management of supply chain comprising procurement, refining and distribution, with a view to planning their taxes properly during the period following the dismantling of the administered pricing mechanism (APM) in the oil sector from April 1."
In this context, Madhavan says that valuation of goods for excise purposes will be of utmost importance. "This can make a vital difference to the bottomline of refining companies," he said.
While doubling of cess on domestic crude oil from Rs 900 a tonne to Rs 1,800 a tonne, the government has opened up avenues for Indian refining companies to source their crude oil from abroad. This competition from imports will put pressure on Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL), which may have to transfer some of their profits to the refining companies.
Though the reduction of excise duty on motor spirit (MS) from 90 per cent to 32 per cent has been neutralised by the imposition of a Rs 6 per litre surcharge on it, the refining companies will stand to lose in case international oil prices keep coming down. The government will, however, continue to get its assured revenue of Rs 6 per litre.
Since the surcharge has been imposed to meet the subsidy burden of PDS kerosene and domestic LPG which is expected to continue for another three to five years, it will reduce the manoeuvrability of refining companies. The refining companies will not be affected by the increase in excise duty from 8 per cent to 16 per cent on LPG, kerosene and auto CNG, since it will be passed on to the consumer.
However, the imposition of 5 per cent service tax will hit most of the refining companies hard. Since these companies enter into hospitality and safekeeping arrangements with other companies and extend services to parallel marketers of LPG and kerosene, all these activities will, henceforth, attract the service tax of 5 per cent.
The concessional excise duty of 50 per cent of the normal duty for the Northeast refineries, while helping the Guwahati Refinery and the Bongaigaon Refineries and Petrochemicals Limited mop up an additional Rs 240 crore and Rs 300 crore per year, respectively, will result in an annual loss of around Rs 250-300 crore for NRL since it has been enjoying complete duty exemption so far.