Date:18/02/2006 URL: http://www.thehindubusinessline.com/2006/02/18/stories/2006021803850100.htm

Back Rangarajan panel for reduction in Customs duties on petrol, diesel — Report submitted to Petroleum Minister

Our Bureau

New Delhi , Feb 17

OIL companies and consumers could breathe easy if the Rangarajan committee recommendations submitted today to the Petroleum Minister, Mr Murli Deora, are accepted.

The committee, set up by the Government to make recommendations on the pricing and taxation of the petroleum products, has made certain radical proposals such as giving oil companies the freedom to fix the prices of petrol and diesel through the trade parity pricing mechanism rather than the existing import parity pricing.

It has also suggested reduction in Customs duties on petrol and diesel from 10 per cent to 7.5 per cent and shifting excise duty from an ad valorem levy to a specific levy.

While acknowledging the need to subsidise kerosene, the panel has called for the subsidy to be restricted to below poverty line families only.

The committee, however, saw no merit in subsidising LPG, which is mainly used by the above poverty line segment of society.

It has recommended an increase of Rs 75 a cylinder on cooking gas.

Beyond this one-time increase in LPG prices, the committee said, it is necessary to gradually increase the price of cooking gas so that the retail price adjusts completely to the market level, eliminating the subsidy altogether.

Trade parity prices would mean a mix of export and import parity prices.

Under trade parity, pricing is lower than the import parity to the extent of freight cost and other taxes and duties.

The current import parity pricing mechanism forces firms to pay Customs and ocean freight for the entire purchase.

The committee wants that retail prices be fixed keeping in mind trade parity - with 80 per cent import parity and 20 per cent export parity weight.

The relative weights are to be reviewed and updated every year, the committee said.

"The Government should stay at arm's length from price determination and allow flexibility to oil companies to fix retail prices under the proposed formula," Dr Rangarajan said, after submitting the report. However, he said that the increase could be subject to a ceiling.

By suggesting reduction in Customs duty to 7.5 per cent, the panel proposes to reduce the effective protection to refiners.

It has also recommended termination of the principle of freight equalisation.

Under this model, the increase in petrol and diesel prices would be lower at Rs 1.21 per litre and Rs 1.96 per litre respectively, against the required increase in Delhi of Rs 1.67 per litre on petrol and Rs 2.65 per litre on diesel.

The committee has also said that the Government could discontinue the practice of asking upstream companies - ONGC, GAIL, and Oil India - to provide assistance, but instead collect their contribution by raising the Oil Industry Development Board cess from the current level of Rs 1,800 per tonne to Rs 4,800 per tonne.

It has said that the Government would need to meet the balance cost of subsidy from the Budget.

Dr Rangarajan said that this set of recommendations relating to adjustments in prices of LPG and restricting subsidy on kerosene should be implemented as an integrated package as partial implementation will not yield sustainable results.

After receiving the report, Mr Deora said that the Government would examine the recommendations keeping in view current domestic imperatives like the needs of weaker and domestically vulnerable sections of society, the financial health of oil companies, equitable burden sharing, and energy requirement of the growing economy.