New Delhi: In a move that will hit oil PSUs hard, the Finance Ministry wants changes in the way petrol and diesel are priced by suggesting excluding the element of import duties to save about Rs 18,000 crore in subsidy bills.
The Finance Ministry has informed the Petroleum Ministry that auto fuel need to be priced at export parity rather than import parity as the 2.5 percent customs duty was adding to the under-recoveries of the state-run oil marketing companies without contributing any revenue to the exchequer.
Sources said Indian Oil, Hindustan Petroleum and Bharat Petroleum together are projected to end the fiscal with close to Rs 1,60,000 crore of under-recoveries or revenue loss on selling diesel, domestic LPG and kerosene below cost.
Upstream oil companies like ONGC are to meet about Rs 60,000 crore of this and the rest Rs 100,000 crore was to come from the government as cash subsidy. By changing the pricing methodology, the Finance Ministry wants to cut its cash outgo by about Rs 18,000 crore in the current fiscal.
Sources said like any other product, traditionally domestic refiners enjoyed 5 percent duty protection by way of higher customs or import duty on petroleum products (finished product) than on crude oil (raw material).
So, if crude oil attracted 5 percent import duty, finished product was charged a customs duty of 10 percent. A few of years back, the duty on finished product was brought down to 7.5 percent and that on crude oil to 2.5 percent.
A couple of years back, the duty on crude oil was brought to zero and that on products to 2.5 percent, effectively reducing the protection refiners enjoyed from flooding of domestic marketed with cheaper imported fuel.
Now, if the import duty on fuel is brought down to zero, the refineries will have no protection.
Sources said the Finance Ministry has informed the Oil Ministry that it plans to remove the 2.5 percent import tax on petrol and diesel since the duty on diesel was adding to the under-recoveries of the state-run oil marketing companies (OMCs) without contributing any revenue to the exchequer.
This would lead to a change in the methodology for calculating the under-recoveries. The imported price of petrol and diesel, which includes customs duty, is used by the refineries to calculate the prices charged from retailers.
The difference between this price and the pump price is the under-recovery or revenue loss.
While the government had freed petrol from its control, diesel continues to be subsidised. There is no import duty on kerosene and LPG, the other two subsidised fuel.
At 2.5 percent, its net effect is an increase of Rs 1.13 per litre on the ex-refinery price of diesel. This translates into an under-recovery of Rs 18,000 crore. On petrol, the customs duty impact is about Re one but it is passed on to the consumers and there is no impact of government's subsidy bill.