No duty on crude if prices reach June 2008 levels

The government is likely to consider abolition of a 5 per cent Customs duty on crude oil if prices start moving towards the June 2008 levels when crude prices were skyrocketing and triggering policy initiatives.

A senior finance ministry official told Business Standard that the decision was avoided in the Budget due to the revenue implications and on the premise that crude prices were still lower than the June 2008 levels. “During Budget deliberations, it had not reached that level so we didn’t touch the Customs duty,” said the official. The Indian basket of crude oil prices stood at around $129 per barrel in June 2008.

The average price of the Indian crude basket, which was $69.76 per barrel in 2009-10, increased to $82.45 per barrel up to February 28, during 2010-11. The price of the Indian basket of crude oil on the day of presentation of the Budget — February 28 — was $109.55 per barrel.

The finance ministry official said duty on crude contributed around 20 per cent to the Customs revenue kitty, adding that abolition of duty at this time would impact revenue collections substantially.

He, however, added that the government was keeping a close watch on the movement of crude oil prices in the international market for taking suitable action.

Public sector oil companies had pinned their hopes on a Customs duty waiver on crude oil and a reduction in excise duties on petroleum products in the Budget to counter rising crude oil prices. In 2008-09, the government had withdrawn the Customs duty on crude oil as international prices had skyrocketed.

The cost of petroleum products in the domestic market primarily depends on the prices of crude oil in the international market, as India imports about 80 per cent of its crude oil requirements. The rising trend in the international prices of crude oil is already putting a huge burden on the benchmarks of the domestic oil companies as apart from petrol, retail prices of other petroleum products are still controlled by the government.

While the price of petrol has been made market-determined in view of the high international prices, the retail prices of other three sensitive petroleum products — diesel, domestic liquefied petroleum gas (LPG) and kerosene for public distribution system — continue to be modulated by the government.

As the retail selling prices of these products are not maintained in line with international prices, the public sector oil marketing companies (OMCs) are incurring under-recoveries on the sale of these products. According to the latest petroleum ministry figures, based on the refinery gate price applicable from March 1, 2011, the OMCs are incurring under-recovery of Rs 11.16 per litre on diesel, Rs 23.56 per litre on PDS kerosene and Rs 297.80 per cylinder on domestic LPG.

A decision on raising prices of these politically sensitive products before elections in five states, including Tamil Nadu and West Bengal, in April-May is highly unlikely. The OMCs, however, may go for another round of price rise in petrol soon to align prices.