Refineries: Players seek clarity on custom duty

Players seek clarity on the under recoveries, removal of Basic custom duty on imported crude oil and corresponding reduction in customs duty on refinery products.

Current status

The refining capacity in the country has been augmented to 186 Million Metric Tonne Per Annum (MMTPA), which is well above the annual demand of about 138 MMTPA.

Oil sector has maintained a status of the highest export revenue earner amongst mercantile products with the country exporting about 51 MMTPA finished petroleum products valued at US$ 31 billion during 2009-10.

Recently the benchmark WTI crude oil prices crossed above $90 per barrel in view of unexpected surge in global demand. Crude prices were propelled higher further by political unrest in Egypt, with Brent crude reaching $100/bbl.

As per December Oil market report global oil demand stood at 87.7 million barrel per day in 2010 the highest level on record with a growth of 2.7 million barrel per day y-o-y or 3.2%- is one of the highest in last three decades.

Such demand strength appears to be more related to a buoyant economic recovery than to the frigid weather conditions that prevailed in most of the northern hemisphere in late 2010. It further foresee global oil demand expanding by 1.4 million barrel per day or 1.6% y-o-y.

Current duty structure

	CENTRAL EXCISE			CUSTOMS DUTY
DESCRIPTION OF GOODS	BASIC CENVAT DUTY	SPECIAL ADDL EXCISE DUTY	ADDL. EXCISE DUTY	BASIC CUSTOMS DUTY	ADDL.     CUSTOMS  DUTY	ADDL. CUSTOMS DUTY
Crude Petroleum	Nil	N.A.	N.A	5%	Nil	N.A
	Rs. 2500/MT as Cess+			Rs. 50/MT as NCCD
	Rs. 50/ MT as NCCD
Motor Spirit	Rs 6.35/ltr.	Rs.6/ltr	Rs.2.00/ltr.	7.5%	Rs 6.35/ltr +	Re.2.00/ltr.
					Rs.6.00/ltr SAD
Motor Spirit (branded)	Rs 7.5/ltr	Rs.6/ltr	Rs.2.00/ltr.
Naphtha      (Non Fertilizer)	14%	N.A.	N.A.	5%	14%	N.A.
-  Fertilizers	Nil	N.A.	N.A.	Nil	Nil	N.A.
A.T.F.	8%	N.A.	N.A.	Nil	8%	N.A.
Kerosene (PDS)	Nil	N.A.	N.A.	Nil	Nil	N.A.
(Non PDS)	14%	N.A.	N.A.	10%	14%	N.A.
HSD	Rs.2.60/Ltr	N.A.	Re.2.00/ltr.	7.5%	Rs.2.60/ltr.	Re.2.00/ltr.
HSD (branded)	Rs 3.75/ltr	N.A.	Rs 2.00/ltr
L.D.O.	14%+	N.A.	N.A.	10%	14%+	N.A.
	Rs. 2.50/ Ltr.				Rs. 2.50/ Ltr
Furnace Oil - Non-Fert.	14%	N.A.	N.A.	10%	14%	N.A.
Fertilizers	Nil	N.A.	N.A.	Nil	Nil	N.A.
Lube oil/greases	14%	N.A.	N.A.	10%	14%	N.A.
LPG(Domestic)	Nil	N.A.	N.A.	Nil	Nil	N.A.
LPG(Non-Domestic)	8%	N.A.	N.A.	5%	8%	N.A.
LNG	NIL	N.A.	N.A.	5%	NIL	N.A.
Natural Gas (Gaseous state)	NIL	N.A.	N.A.	5%	Nil	N.A.
Petroleum Jelly	14%	N.A.	N.A.	10%	14%	N.A.
Waxes all types	14%	N.A.	N.A.	10%	14%	N.A.
Petroleum Coke	14%	N.A.	N.A.	5%	14%	N.A.
LSHS/ HPS & other Res. (non Fertilizer)	14%	N.A.	N.A.	10%	14%	N.A.
- Fertilizers	NIL	N.A.	N.A.	10%	NIL	N.A.
Bitumen & Asphalt	14%	N.A.	N.A.	10%	14%	N.A.
Additional Duty of Customs @4% would be levied in lieu of sales tax / VAT except petrol, diesel, SKO(PDS), LPG(Dom), coal, coke and petroleum gases and fuels of Chapter 27 on direct imports for consumption.
- In addition to above, Education Cess @2% on aggregate duties are being charged w.e.f. 9.7.2004 and additional 1% will be charged w.e.f. 1.3.2007.

Industry expectation

Basic custom duty on imported crude oil should be reduced to nil rate from currently 5%.

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

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. At present downstream industries (refineries) has to reverse almost 50% of the Cenvat credit because it manufactures SKO, LPG, Naphtha which are exempt from excise duty.

Abolition of National Calamity Contingent Duty on crude oil imported by downstream sector.

ATF to notify as declared goods.

MS, HSD, ATF, Crude oil and Natural gas to be included in GST.

Analysts/market expectations

We expect some tweaking in duty structure of crude oil as well as on petrol and diesel.

Stock to watch

RIL, Indian oil, BPCL, HPCL, Cairn Energy

Outlook

If there is similar fall in the customs duty on crude oil and petroleum products (say, removal of customs duty on crude oil, reduction by 5% to 2.5% in refinery products), it will be marginally negative for Indian refinery margins, and hence for the domestic refiners.

With relatively sticky fuel prices, any reduction in customs duty on petroleum products (without reduction in the retail prices) will be beneficial for marketing companies.

So, on an overall basis, reduction in customs duty on crude oil and petroleum products will be beneficial for Oil Marketing companies, and will be marginally negative for stand alone refineries.

The government had decontrolled the price of petrol citing reforms in the oil and gas sector with expectation of diesel deregulation. However spike in crude oil prices and rising inflation altered the government calculations and it was put on the backseat.

Rising crude oil prices is also increasing the under recoveries of the downstream public sector companies. However any clarification although minimal regarding clarity of subsidy sharing mechanism would be a welcome move.