Refineries want crude, natural gas, petro products under GST

Crude oil prices have again risen to $80 per barrel.  Without revision in petrol, diesel, kerosene and LPG prices, the under recoveries of Oil Marketing Companies are rising significantly. Total under recoveries in 2009-10 is estimated to be Rs 45478 crore.

This would be mean more dependency on oil bonds given by the government. Currently refinery industry has taken a hit in recent times with tough environment resulting from lower Gross refining margins (GRMs).

Operating rates remained suppressed during Q3FY'10 - Europe averaged at 75%, US remained in the sub-80s and Asia remained at around 82%. Product cracks too have remained low.

Compared to this domestic demand seems robust with growth in transportation and cooking fuel segments

Current duty structure  

Industry Expectation

Exemption of excise duty for captive consumption of intermediate products within the refinery for manufacture of exempted products

Refineries are unable to avail CENVAT credit for the input duty of Rs 200 crore due to the manufacture and clearance of Naphtha supplied to Fertilizer Units, LPG (Domestic) and SKO for public distribution, on which goods the government has, for socio economic reasons, maintained the rate of duty as 'nil'.

Hence a major part of almost 40% of the above input credit of Rs. 200 crore is to be 'reversed' since they represent the prorata input credit used in the manufactures of exempt products. To remedy the above anomaly, Naphtha supplied to Fertilizer Units, LPG (Domestic) and SKO for public distribution should be included in rule 6(6) of Cenvat Credit Rules, 2004, so that the exemptions given by the Government for socio economic reasons do not deny the benefit of full CENVAT

NCCD (National Calamity Contingent Duty) and cess thereon may be abolished and if necessary, the loss of revenue to the exchequer could be adjusted in the tariff rate of any other product since after the withdrawal of customs duty on import of crude, payment of a nominal sum as NCCD for crude oil imports involves customs procedural formalities.

All petroleum products including crude oil & natural gas should be included under GST and the full benefit of credit across the value chain as per VAT principles is given or in the alternative, there should be maintenance of status quo with appropriate amendments to the VAT Acts / Cenvat Credit Rules, so that the credit chain currently existing in the Petroleum Industry is not broken.

If crude petroleum, petroleum products and natural gas are kept out of the GST, it would lead to a situation where the inputs / input services consumed by the Industry would have suffered tax under the State GST / Central GST legislations at the time of their purchase, whereas the sale of goods manufactured by the Oil & Gas Industry would be liable to tax under the existing Excise act, Service tax legislation and the State VAT Acts.

Thus the inputs would have suffered tax under one legislation and the outputs would suffer tax under a different legislation, leading to a break in the tax credit chain.

Implementation of Kirit Parikh Committee if not fully partial implementation.

Analysts/market expectations

We don't expect any significant changes or notifications for the refinery segment. Full implementation of Kirti Parikh committee is unlikely. Given the high and rising subsidies, and the need to contain fiscal deficit and government borrowings, sooner than latter partial implementation could be considered but not in the ensuing Union Budget 2010-11.

Stock to watch

RIL, Indian oil, BPCL, HPCL

Outlook

Kirit Parikh committee has recommended complete deregulation of petrol and diesel prices along with increase in kerosene prices by Rs 6 per liter and Rs 100 per cylinder for LPG. Earlier committees on oil prices viz. the Rangarajan Committee and the Chaturvedi Committee were sidelined and not implemented owning to social and political concerns. Even partial adoption of Parikh committee recommendations would mean better health for PSU refiners and explorers.