The Hindu Business Line : A mixed package for oil and gas industry

Sector map
Excise duty on petrol and diesel cut from 8% to 6%
Infrastructure Status for gas pipeline projects.
Outsourcing for mining of oil and gas under service tax net.

MR S.V. NARASIMHAN

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New Delhi Feb. 28 While the Finance Minister, Mr P. Chidambaram's Budget proposals for 2007-08 have little to offer to the consumers of petrol and diesel, and upstream companies, it has some respite for the oil marketing companies and those looking at the gas pipeline business. Terming it as a mixed bag for the sector, industry experts said, "It is positive for the oil marketing companies, weighs heavy for the exploration companies, and beneficial for the entities looking at midstream activities."

The proposal to cut the ad valorem component of excise duty on petrol and diesel from 8 per cent to 6 per cent is unlikely to result in a cut in the retail selling prices (RSP) of these two products as they had been factored in at the time of the latest price reduction.

The duty cut would have translated into 47-48 paise per litre in petrol and diesel price. The Government had reduced the prices in February despite oil companies losing Rs 1.35 a litre on diesel and this proposed cut is unlikely to be passed on to the consumer. After the price cut, under-recovery on diesel has increased to Rs 2.35 a litre.

The Petroleum Minister, Mr Murli Deora, said, the Finance Minister has kept his promise and reduced excise duty on petrol and diesel. "When we reduced the prices of petrol and diesel on February 15 by Rs 2 and Re 1 per litre respectively, the Finance Minister had committed to partly meet the reduction through changes in duties," he added.

Speaking to Business Line, the Director (Finance) at Indian Oil Corporation Ltd (IOC), Mr S.V. Narasimhan, said the cut would result in the company's under-recovery on the two products decline by Rs 1,250 crore annually. For the industry, the under-recovery on sale of the two products is expected to come down by Rs 2,500 crore. However, the duty cut may not translate into an increase in profit for IOC, as the size of oil bonds issued to the oil marketing companies may also come down.

The benefits expected by reduction in central sales tax (CST) by one per cent would be offset by increase in education cess proposed, the oil companies argued.

The private sector players, Reliance Industries Ltd and Essar Oil Ltd, felt that the excise duty cut would result in bringing parity in retail pricing of these two products vis-à-vis the public sector companies. Mr A.N. Sinha, Managing Director, Essar Oil, said, "The reduction in duty will result in marginal relief. This too has been partly eroded by increase in education cess, which adds to the cost of feedstock for refineries."

Enabling infrastructure

The proposal to extend the infrastructure status to cross-country natural gas distribution network, including pipeline projects and storage facilities, would prove positive for companies like RIL, GAIL (India), GSPL, Gujarat Gas, and Indraprastha Gas Ltd. Section 80IA of the Income Tax Act lists the infrastructure facilities that are entitled to tax concessions. "Infrastructure status will help new players as well as those who are into the gas business," Mr U.D. Choubey, CMD, GAIL said.

Extension of service tax to mining of oil and gas proposed in the Budget is going to be marginally negative for ONGC, Reliance, and Cairn India. Summing up the proposal for the sector, Mr Ravi Mahajan, Partner, Oil & Gas Practice, Ernst & Young, said, "The industry had several expectations, but the Government has offered a mixed set of proposals."