However, this could improve urea supply due to resumption of operations of the two urea plants in the state.
According to the state administration, the decision will also help protect hundreds of jobs in these two plants.
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The move is in response to the letter written by the Union fertiliser secretary asking the state to consider waiving VAT on naphtha consumed by SPIC at Tuticorin and Madras Fertilisers Ltd (MFL) for resuming Centre's subsidy to them.
Meanwhile, the state government has urged the Centre to issue a notification for the continuance of subsidy immediately to the two fertiliser units.
"I understand that the notification for the continuance of subsidy has not yet been issued pending the confirmation from the state government on the waiver of VAT," chief minister O Paneerselvam said in a letter to the Prime Minister.
The Centre earlier had decided to discontinue subsidy for these two plants since October 2014 till such time it provides gas connectivity to them.
The two plants with a total capacity of 1.1 million tonne per annum has remained shut for the last three months leading to a shortage of the prime agri commodity.
Paneerselvam said the issue was "adversely' affecting the livelihood of hundreds of workers and was disrupting production of urea at both state and national level, necessitating higher imports.
According to industry sources, the state government will now have to forego around Rs 50 crore in VAT from the operations of SPIC and Rs 40 crore from MFL.
The chief minister said oil marketing companies were charging import parity price for naphtha supplied by them to the fertiliser units, and this was significantly higher than the price at which they exported the commodity. Hence, he suggested it would be fair for them to claim only the export parity price.
He also requested the Centre to consider fertiliser allocation to the state from these two plants in view of ease in logistics and other reasons.