IOC seeks surcharge on UP petroleum products sale

Last Updated: Sun, Mar 04, 2012 04:00 hrs

Faced with a Rs 8,700-crore tax liability, Indian Oil Corporation has asked the Union government to allow it to levy a surcharge on the sale of petroleum products in Uttar Pradesh. The state-owned enterprise wants the effective surcharge to be worked out in a manner that it makes up for the present and past liability on account of five per cent entry tax within three years.

The Mumbai-headquartered company has written to the Union ministry of finance seeking the levy, and is expecting that a decision on it will come after the ongoing assembly elections. A senior official told Business Standard that the proposal was in line with a similar levy in Maharashtra which is collected in lieu of octroi charged in the state.

In the case of Maharashtra too, the company has sought an increase in the surcharge amount which is currently at a flat rate fixed in 2002, compared to a 3 per cent octroi duty levied on an ad-valorem basis.

The Allahabad High Court had, on December 23 last year, dismissed a writ petition by IndianOil. The bench upheld the UP Entry Tax Act 2007, whereby the state had levied 5 per cent entry tax on crude oil brought to Mathura refinery.

At this, the company filed a special leave petition, leading the Supreme Court to issue an interim order on January 17 to stay the operation of the High Court judgment, subject to IndianOil depositing 50 per cent of the accrued tax liability and arrears and furnish bank Guarantee for the balance amount. “The orders may have financial implication on the company, which is under examination,” the company had said in a notice to the Bombay Stock Exchange after the apex court order. “The matter is also being examined legally for further course of action.”

The company has simultaneously asked the state government to withdraw the entry tax, since it will make operations of its Mathura refinery unviable. IndianOil was earlier aiming to increase capacity of the refinery to 11 million tonne from current 8 million tonne. “At $110 a barrel, we make a gross refinery margin of $4-5 at Mathura,” said a senior company executive. “With the tax, the margins turn almost negligible.”

The C Rangarajan Committee on Pricing and Taxation of Petroleum Products had, in 2006, recommended the withdrawal of such levies by the state governments or local bodies in view of their “distortionary” impact. “If that option fails,” the report said, “the second best option is to encourage the state governments/local bodies to replace the entry tax/octroi by a surcharge on sales tax on finished petroleum products.”

To the extent the current impost is octroi levied by a local body, the report said the state government could compensate the local body out of the surcharge it collects. “It is important to calibrate the surcharge to be equal to the entry tax/octroi so that consumers are not unduly burdened.”

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