Firms seek hike in petrol, diesel prices

Retailers want Rs 2.50 a litre hike in petrol prices

Oil companies have approached the government for a Rs 2.50-a-litre price hike in petrol and Rs 1.70 in diesel after changes in the duty structure announced by Finance Minister P Chidambaram yesterday.

A fifty paise increase in road cess has also landed for oil marketing companies as retail prices have not been increased.

"I am readying myself to go to the Cabinet to secure instructions as to how to proceed further. This will take a few weeks' time. Till such time, there will be no change in prices," said Petroleum Minister Mani Shankar Aiyar.

Chidambaram had proposed in his Budget a combination of specific and ad-valorem excise duty structure for petrol and diesel while making exicse on kerosene nil. It implies an excise of 8 per cent plus Rs 5.

The government will levy Rs 6 as special additional excise and Rs 2 as road cess. This will replace the current 23 per cent excise, Rs 6 special additional excise, and the Rs 1.50 cess on the petrol retail price.

In the case of diesel, the change will mean an additional burden of Rs 1.75 as excise not only remains at 8 per cent but there is also an additional Rs 1.25 excise levy besides a 0.50 paise increase in cess.

"We are weighing in the implications of the Budget for the entire range of proposals for the oil sector," Aiyar added.

The proposals reflect the suggestions by an advisory group on tariff, headed by Chief Economic Adviser Ashok Lahiri, for insulating the economy and oil price hikes. But, in the current form, it appears to be bleeding the oil marketing companies more as there is also a squeeze in their refinery margins because of a Customs duty cut.

On the other hand, Chidambaram's decision to impose a 10 per cent service tax on pipelines will reduce the price advantage of petroleum product pipelines to only about 10 per cent over the railway tariff. Besides, it will also end up to be the last straw for pipeline companies, which are already in red.

Industry players say since service tax is passed on to customers it appears that if an oil company is transporting its own product it will not attract the 10 per cent levy.

This leaves pure pipeline companies like Petronet India with a disadvantage. The company is already on the block and is finding no takers.

The oil companies as per one estimate may end up forking out Rs 300 crore on account of 10 per cent service tax.

Indian Oil Corporation officials told Business Standard that transportation of products from its refinery to depots is not likely to attract the tax since it would be from one department to the other.

"We are calculating the exact effect but as of now it appears that even transportation of products to other companies will not attract service tax," said an official.

Hindustan Petroleum and Bharat Petroleum, for instance, buy products from Panipat refinery in the northern region but they are moved by pipeline to Bhatinda but sales to these companies are through depots and terminals.

In the case of crude pipelines, IOC would feel the impact only at its Bongigaon refinery which receives crude from Oil India Ltd pipeline.

"The pipeline sector will become a non-starter. It is already not economically viable and a 10 per cent service tax will make it more unviable," said S Madhavan, head, indirect tax practice, Pricewaterhouse Coopers .

Pipeline tariffs are at present pegged at 75 per cent of the railway freight. With the Railways reducing their freight rate for petroleum products by 10 per cent and the government imposing a 10 per cent service tax, the effective price advantage offered by pipelines will be only 10 per cent.