Reduction in Custom Duties on Crude Oil Could Have Negative Impact on Expansion of India's Northeast Refineries

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Researched by Industrial Info Resources India (Delhi, India)--Refineries in the northeastern part of India could lose as much as $420 million annually because of the government's recent restructuring of duties. The Ministry of Petroleum and Natural Gas reduced customs duties on crude oil from 5% to nil, and on gasoline/high-speed diesel (HSD) from 7.5% to 2.5%. It also reduced excise duties on HSD from $0.095 per liter to $0.041.

The changes were made in hopes of increasing the low profits of oil marketing companies, which have been caused by escalating crude oil prices. The move, which helped the oil marketing companies and upstream companies in reducing the subsidy burden, has severely affected the already small profits of the northeastern refineries.

The reduction in customs duties on imported crude oil, which benefits refiners in other parts of the country, has not benefited the northeastern refiners, which process indigenous crude oil on which they are required to pay a value-added tax of 5% and another entry tax of 2%. In contrast, refining companies in other parts of India are in much better positions, as they process imported crude oil and are benefiting from the crude duty reductions. They also are not required to pay either the value-added tax or the entry tax.

Further, the northeastern refiners get 50% excise duty concessions to promote growth in the region. Due to the decline in the excise duty on gasoline and HSD, the refiners are again losing out on another $126 million benefit provided by the government.

The state government also has increased the value added tax on crude oil by another percent, which has further increased the losses being incurred by the refiners.

There are four refineries in the region: Guwhati, Bongaigaon and Digboi, which are owned by Indian Oil Corporation Limited (BSE:530965) (IOCL) (New Delhi, India), and another owned by Numaligarh Refinery Limited (Golaghat, Assam), which is a subsidiary of Bharat Petroleum Corporation (BSE:500547) (Mumbai, India). The four refineries together have a crude processing capacity of 153,000 BBL/d.

IOCL and the North Eastern Region Oil Worker's Co-ordination Committee have raised objections in the parliament and have asked for changes in the duty structure to negate the losses being incurred. The reduced profits may cause liquidity problems and can adversely affect the various modernization projects being planned and undertaken.

The projects are aimed at increasing capacity and improving distillate yield.

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