People's Democracy

  Create A Separate Price Stabilisation Fund

Extracts from the recommendation of the Standing Committee on Petroleum & Natural Gas placed in parliament on April 20, 2005.

THE Committee notes, that the government Budget subsidy on PDS kerosene and domestic LPG, which is now given on flat rate, would continue to be provided only till March, 2007. The Committee further notes that the major share of the total subsidy given to the consumer is stated to be shouldered by oil companies as under-recoveries. The Committee have been informed that during April-December, 2004 about 91 per cent of the subsidy amount on PDS kerosene has been borne by oil PSUs and only 9 per cent from the government budget. Similarly, in case of domestic LPG, about 85 per cent of the subsidy has been borne by oil PSUs and 15 per cent from the government budget. Moreover, the Committee also finds that the total subsidy of Rs 6,292.44 crore given by the government during 2003-04 on petroleum products forms only a meager 12.4 per cent share of Rs 50,733 crore which the POL sector has contributed to the government’s coffers as customs and excise duties alone. The Committee, therefore, fails to understand the enthusiasm shown by the government to phase out subsidy given on PDS kerosene and domestic LPG, thereby leaving the customer at the mercy of market determined prices, duty structure etc. Keeping the interests of the common man in mind, the Committee recommends that the subsidy on PDS kerosene and domestic LPG be continued beyond March 31, 2007. A part of this subsidy can be borne by the oil companies and the rest from the cess collected on indigenous crude.

In reply to a recommendation made in their Report on Demands for Grants (2004-05), the Committee have been informed that up to March 31, 2004, the central government has collected a sum of about Rs 51,007.60 crore as cess. Out of this, Oil Industry Development Board (OIDB) has received only Rs 902.40 crore till March 2004. The Committee in their First and Fourth Report (14th Lok Sabha) had recommended that a separate Price Stabilisation Fund be created using the money collected from cess on indigenous crude to bring in stability in the prices of petroleum products. However, the Committee regrets to note that such a fund has not yet been created. The Committee once again reiterate that such a Price Stabilisation Fund be created using a part of the cess without any further delay.

Certain changes have been effected in the tax levies on crude oil and petroleum products from March 1, 2005 by the general budget proposals (2005-06). The Committee finds that the customs duty on crude has been reduced from 10 per cent to 5 per cent on domestic LPG and PDS kerosene from 5 per cent to nil, on petrol and diesel from 15 per cent to 10 per cent and on other petroleum products from 20 per cent to 10 per cent. Similarly, the excise duty on PDS kerosene and domestic LPG has been brought to nil from 12 per cent and 8 per cent respectively. For petrol and diesel, the excise tariffs comprise a mix of ad valorem and specific component. Before March 1, 2005, it was 23 per cent + Rs 7.50/ litre for petrol and 8 per cent + Rs 1.50/ litre for diesel. But in the revised scenario i.e. w.e.f. March 1, 2005, it is 8 per cent + Rs 13/ litre and 8 per cent + Rs 3.25/ litre respectively. Though these changes were projected to be revenue neutral by the Ministry of Finance, the Committee are astonished to see that it adds an incremental revenue of Rs 3,000 crore per annum to central coffers. The Committee further finds that this has resulted in an excise duty increase of Rs 2.52 / litre on petrol and Rs 1.65/ litre on diesel, though there is a reduction of Rs 17.75 per cylinder of LPG and Rs 0.88/litre of kerosene. Thus, whatever has been given by one hand has been taken away by the other. To be more precise, the effect of customs duty cut has not only been neutralised but also supplemented by the changes made in excise levies. The Committee apprehends that the added burden on excise front would also be passed on to customer in the name of exorbitant rise in international prices of these products. The Committee expresses their serious concern about the excise duty hike on the most commonly used petroleum products, especially at a time when the international prices of these products have gone all-time high. Any price reform in the oil sector should keep the interests of the customer in mind and attempt at rationalising the duty structure/ adjusting the duty in such a way that the cascading effect of the international petroleum prices does not weigh down the customer. The Committee, therefore, recommends that excise duties on petroleum products should be so structured that the additional revenue of Rs 3,000 crore is neutralised so that the budget statement of revenue neutrality is adhered to in letter and spirit.

The Committee note that that oil sector contributes a giant share of the total revenue of the government through customs duty, excise duty, sales tax, cess, royalty, dividends from oil PSUs etc. During 2003-04, an amount of Rs 50,732.79 crore as excise duty, had been the share of the hydrocarbon sector. As per the tax research unit of Ministry of Finance, the percentage share of customs duty from the oil sector in the gross revenue of the government is 21.77 per cent and that of excise duty is 44.17 per cent. The Committee feels that this sector is banked on rather too heavily by the government to mobilise its revenues. Though no government can ignore the revenues from the oil sector, the practice of squeezing the maximum out of the sector without concern for the common man at large is something which needs to be changed. Hence, the Committee urges upon the government to exercise restraint and apply the policy of prudence in taking revenues from a strategic sector like hydrocarbons.

The Committee had noted that the current rate of cess of crude oil produced in the country was Rs 1,800 per tonne since March 2002. The Committee had regretted to note that no amount generated out of cess levied on crude oil had been allocated to the organisation since 1992-93. As admitted by the secretary, the annual average of such cess came to about Rs 5,000.00 crore which over a period of 12 years would amount to about Rs 1,00,000.00 crore including interest. This amount had not been made available to the OIDB or the Ministry of Petroleum and Natural Gas. In the Committee’s view, there was no justification in levying the cess if the amount generated from it was not being utilised for the development of the oil sector. The Committee had recommended that a Price Stablisation Fund should be created to bring in stabilisation in the prices of petroleum products by using the money collected from cess on crude oil. This fund should be utilised to absorb fluctuations in the international price of crude oil. Funds may be credited or debited in this fund depending upon the fall or rise in international prices. This amount could also be used as a cushion in case of reduction in the import duty/excise duty on LPG, kerosene, petrol and diesel and to provide subsidy on kerosene and LPG. The Committee had desired to be apprised of the action taken by the government in this regard.

The Committee have been informed that since inception upto March 31, 2004, the central government has collected a sum of about Rs 51,007.6 crore cess on indigenous crude oil, out of which the Oil Industry Development Board (OIDB) has received a meager amount of Rs 902.40 crore till March, 2004. This speaks volumes about the way the cess collected for the development of the oil sector is being utilised. The Committee, therefore, reiterate their earlier recommendation that there is no justification in levying the cess if the amount generated from it is not being utilised for the development of the oil sector. In case the cess is to be levied, it should be used to meet the subsidy on PDS Kerosene and Domestic LPG. The Ministry of Petroleum & Natural Gas has agreed to this recommendation and is in the process of forwarding a proposal to the Ministry of Finance and a decision taken in this regard before the presentation of the next budget, under intimation to the Committee.

They also recommend that the proceeds of this cess should not be credited to the Consolidated Fund of India. Instead, as recommended by the Committee earlier, a separate Price Stabilisation Fund should be created by using the money collected from cess on crude oil to bring in stabilisation in the prices of petroleum products and to provide subsidy on Kerosene and LPG. In this regard, the government has informed the Committee that no Price Stabilisation Fund is required for petrol and diesel since the price band mechanism for these products has an inbuilt mechanism to allow variations in product prices in tandem with import parity prices. In the Committee’s view, this inbuilt mechanism is not enough to achieve the requisite price stablisation. The Committee, therefore, reiterate their earlier recommendation on this point.

Some important Recommendations of the Standing Committee

on Petroleum & Natural Gas