Finance Ministry's move to drastically change the way petrol and diesel are priced may sound the death knell for some of the domestic oil refineries, an industry association has warned.
The Finance Ministry wants auto fuel to be priced at export parity by abolishing 2.5 per cent customs duty on petrol and diesel to save up to Rs 18,000 crore in annual subsidy outgo.
The Petroleum Federation of India (Petrofed), an apex body of entities in hydrocarbon sector, on January 28 wrote to Finance Minister P Chidambaram saying removing duty protection on products would render "some inland refineries sick" while private refiners like Reliance Industries and Essar Oil may resort to exporting their full production.
There is no import duty on crude oil and if the same on petrol and diesel is also abolished, there were be no duty protection left to the refineries who included the element of customs duty in pricing of the product to make up for freight, Central Sales Tax (CST) and other charges.
"While a change from trade parity pricing to export parity pricing may benefit fiscal management of the government in short term by lowering its subsidy burden but it would render a serious blow to the domestic refineries," it wrote.
It said domestic refineries were removed from the cost plus mechanism on April 1, 1998 and pay the price of feed-stock crude oil on import parity basis. Indigenous crude oil is also paid for the refineries on import parity basis.
India imports nearly 80 per cent of its crude oil requirements.
"When the primary raw material is on import parity basis, the FOB export parity pricing for products would clearly be extremely unfair to the refineries," it said.
Making out a case against export parity pricing, Petrofed said Indian refiners ar subjected to a freight cost on crude oil vis-a-vis West Asian refineries which is at least USD 05-0.8 per barrel.
In addition, energy costs are higher since energy equivalent to 7 to 8 per cent of throughput is consumed in processing and has to be met by either crude oil based products of imported liquid gas (LNG) whereas the west Asian refineries met such energy needs from surplus gas.
Besides, Indian refineries incur heavy demurrage on import of crude oil due to constraints in infrastructure at Indian ports and also pay VAT/CST at the rate of 2 to 5 per cent on purchase of crude oil from domestic producers which is not