Finance ministry mulls specific duty on oil

Price-hike may be effected shortly, duty changes may form part of Budget speech on July 2.

With international crude prices hitting the roof and domestic oil companies pitching for a matching increase in the retail prices of petrol and diesel, the finance ministry has finally decided not to push the matter under the carpet but take policy initiatives to address the issue.

Today, US light crude peaked, the highest seen in 21 years of New York oil futures trading, before drifting off to sit 49 cents down at $41.84 a barrel. London Brent crude fell 62 cents to $38.46 a barrel.

Finance Secretary DC Gupta and Chief Economic Adviser Ashok Lahiri have convened a meeting with senior officials of the petroleum ministry here on Friday to take stock of the situation and work out a package comprising a marginal increase in the prices of the two auto fuels and duty adjustments.

Petroleum ministry officials say that the issue of changing duty structure from ad valorem to specific may also be discussed at the meeting. Petrol and diesel levies constitute 138 and 57 per cent of the retail prices of the two products.

While the price-hike may be effected shortly, duty changes may form part of Finance Minister P Chidambaram's Budget speech on July 2.

The meeting has been fixed for June 4 keeping in mind the June 3 meeting of the organisation of petroleum exporting countries (OPEC), that is expected to discuss the issue of an unprecedented spurt in the international prices of crude and may raise output quotas of member countries to cool down the market.

Petroleum Minister Mani Shankar Aiyar is on record having said that the government would decide on its next move with regard to the domestic prices of petrol and diesel after considering the outcome of the OPEC meeting.

Official sources said the petroleum ministry has suggested that the finance ministry revisit the Rs 6 a litre surcharge on petrol that had been imposed in the 2002-03 Budget, presumably to provide for subsidy on cooking gas and kerosene, since the cross-subsidy mechanism in the petroleum sector through oil pool account was abolished with the dismantling of the administered pricing mechanism that year.

Though the subsidy on these two popular cooking fuels has been gradually reduced over the past two years, and now stands reduced to one-third of that prevailing in 2002-03, there has been no change in the surcharge.

The finance ministry hopes to generate Rs 6,500 crore this fiscal from the surcharge. The surcharge had yielded Rs 6,200 crore during 2003-04.

Petroleum ministry feels that in case a correction is carried out in the surcharge in view of the reduced subsidy, there may not be any need for a price hike in the two auto fuels.

The meeting will also have a relook at the structure of the import parity price that the domestic oil marketing companies are allowed to charge the consumers of the two auto fuels. One of the components of this price is a 20 per cent customs duty on the two products.

The petroleum ministry is of the view that the customs duty was imposed on the two products to protect the domestic refining industry.

Officials point out that while arriving at the import parity price, the companies should be allowed to factor in only the 10 per cent customs duty that imported crude attracts.

The Left Front supporting the new government wants it to utilise the revenue from the Rs 1,800 a tonne cess on indigenous crude, for cushioning the impact of the spurt in crude prices on retail prices of petrol and diesel.

The cess, meant for the development of the oil sector in the country, was doubled from Rs 900 a tonne to Rs 1,800 a tonne in the 2002-03 Budget.

"The cess has no meaning as the oil sector is decontrolled. Funds for their development should be spent by the cash-rich oil companies themselves and the cess money should be used for protecting domestic consumers of petrol and diesel against volatilities in the international oil market," Dipankar Mukherjee, Left leader and member of the Rajya Sabha, had told Business Standard.

Petrol and diesel prices were last revised by public sector oil marketing firms on December 31-January 1. And the international prices of oil have been steadily going up after that. Brent (dated), which was hovering around $31 a barrel in the international market on January 1, touched a 13-year high this month and has shot up to around $38.95 a barrel.