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NEW DELHI, Dec. 27

EVEN while recommending that the existing ad valorem excise levy on petro products be replaced by specific duties, revenue considerations have prompted the Kelkar Committee not to recommend any particular level or range of specific excise duties.

Currently, the ad valorem excise rates on petroleum products amount to 32 per cent for petrol and 16 per cent for diesel and other products. In addition, petrol also attracts specific levies — Rs 6-per litre `surcharge' imposed in the 2002-03 Budget and Rs 1-per litre cess for funding highway development. Diesel, too, attracts the Rs 1-per litre specific road cess.

What the Committee has suggested is that the entire excise duty structure — particularly for diesel and petrol — be made specific, which involves converting the ad valorem Cenvat component to specific rates, while continuing with the already specific surcharge and cesses. It has also prescribed raising the Central excise duty on kerosene by Rs 1 per litre (to discourage adulteration of petrol and diesel) and imposing an additional duty of a similar amount on light diesel oil to make the duty on par with diesel.

The rationale given for the suggested shift to a specific excise duty regime for petro products is that following the dismantling of the administered pricing mechanism (APM), domestic refiners have been setting prices periodically taking into account fluctuations in international oil prices.

"Such periodical revisions in the prices make administration of ad valorem levy difficult. Replacing ad valorem levy by specific duties would ensure certainty in the duty, which the refineries would have to pay. This would facilitate assessment and would also be administratively convenient. The need for ascertaining the market cost, inland freight, margin, etc would also be obviated," the committee has argued its report.

What is significant, however, is that the committee has refrained from recommending any particular specific duty rates and has, instead, suggested that "keeping in view the importance of the petroleum sector to the (Centre's) revenue, there should be a quarterly review of the specific duties by joint discussions between the Department of Revenue and Ministry of Petroleum so that the duty rates can be adjusted to take account of fluctuation of prices in the prevailing quarter".

In other words, the specific duties are to be changed every three months, with due consideration being given to the revenue implications of changing global — and, in turn, domestic — prices of oil. Keeping the specific rates of excise open-ended is also linked to the committee's recommendations pertaining to the customs duty structure for petro products.

The committee added that the basic customs duty on crude oil be brought down from the existing 10 per cent to eight per cent in 2003-04 and five per cent in 2004-05, with the corresponding reduction being from 20 per cent to 15 per cent and 10 per cent in the case of refined products.

The basic intent behind not prescribing any particular level of specific excise duties is clear from the committee's observation that "revenue loss on account of reduction of import duty in the petroleum sector may be made up through suitable increase in excise duty on petroleum products, namely, diesel and petrol".

Thus, there is a possibility that specific duties of excise on petro products may leave a higher burden on the consumer than what he is currently experiencing through ad valorem duties. What the Government could lose, by way of revenues, on account of reduction in customs duties as well as fall in international oil prices, could be made up through appropriate `adjustments' in the specific duty rates. This may be bad news for the consumer though, who will not be able to reap the benefits of deregulation and APM dismantling (especially in the event of falling global prices).

The committee has also recommended withdrawal of the current warehousing facility for petro products. While for most goods, excise has to paid once they are cleared from the factory, petroleum products can be moved from the refinery to a warehouse or from one warehouse to another warehouse without payment of duty.

According to the committee, this facility, involving physical verification of re-warehousing of non-duty paid petro products, was a time-consuming process. "With the proposal for the introduction of monthly payment of duty, the proposed privatisation of the sector and the introduction of specific rates, there is no reason why petroleum products should not be treated at par with other goods. This would also obviate the problem of transit losses, which today results in disputes," it pointed out.

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