The finance ministry has decided to rationalise "irrecoverable" state taxes on refineries and petroleum products before dismantling the administered pricing mechanism (APM) in the oil sector from April 1.
These "irrecoverable" taxes had amounted to Rs 2,000 crore during 2000-01.
Under the state surcharge scheme, the burden of state taxes levied on refineries are considered state-specific costs. The amounts paid to any state towards these taxes are collected in the administered prices of these products in that state by loading a state specific surcharge.
More From This Section
These "irrecoverable" state taxes could be either on raw material used by refineries, or on their sales turnover, or the central sales tax payable on inter-company sales between the refinery and the marketing company for inter-state movement of retail products.
In case the state surcharge scheme is withdrawn after the dismantling of the administered pricing mechanism and the cost of irrecoverable taxes levied on producers are not recovered from the concerned states, the finance ministry is apprehensive that in the absence of any understanding with the states, the states levying these taxes may increase their rates and other states may also be tempted to levy such taxes.
The finance ministry says that in the post-APM period, consumer prices will move towards import parity. Therefore, domestic refineries will be able to realise from marketing companies only a price equal to the cost of imported products.
All irrecoverable taxes payable by the refineries, in the absence of any mechanism to compensate them from such taxes, will need to be absorbed by the refineries.
Consequently, the duty protection to the refineries will reduce to that extent. Therefore, the finance ministry says that rationalisation of irrecoverable state taxes is a pre-requisite for the dismantling of APM.