IOC-Reliance tax issue hots up

NEW DELHI, AUG 19: Top bureaucrats of the ministry of petroleum rushed to Gujarat to discuss the contentious issue of who will pay the sa...

NEW DELHI, AUG 19: Top bureaucrats of the ministry of petroleum rushed to Gujarat to discuss the contentious issue of who will pay the sales tax on the production of Reliance’s 27 million tonne Jamnagar refinery. While Reliance contends that either Indian Oil Corporation (which has an agreement to lift Reliance’s products) or the Oil Pool Account should bear it, IOC says this is not its responsibility. In the event, only a very small part of the diesel being produced by the refinery is being sold, and only in Gujarat. The rest is being stock-piled by the refinery till the sales tax issue is resolved — currently, the refinery has unsold stocks of 1,80,000 tonnes of diesel in its storage tanks.

Ministry officials had to rush to discuss the issue with the Gujarat government as, if things are not resolved quickly, the country’s largest refinery may even have to start staggering production soon, once the unsold stock starts reaching the overall stocking limits of the refinery. Fortunately, ministry sourcessaid, the refinery is not in full production, or the problem would have become very acute. The ministry team included additional secretary Naresh Narad, Joint Secretary Shivraj Singh, apart from MS Ramachandran, executive director of the Oil Co-ordination Committee (OCC). The team returned today — sources said the Gujarat government was receptive, though it is still not clear as to what exactly it has agreed to.

The crux of the problem is the 18 per cent local sales tax that the Gujarat government levies on sales of the Jamnagar refinery within the state. In other words, if Reliance sells its products to IOC in Gujarat itself (which IOC then markets it in the rest of the country), a local sales tax has to be levied on it. IOC says Reliance should bear this, as this cannot be passed on to consumers in other parts of the country — these consumers in any case have to pay for the Central Sales Tax as well as other local taxes where they reside, and so cannot be asked to pay an additional Gujarat localtax.

Reliance, however, contends that either IOC should pay this or the tax should be absorbed by the oil pool account. Reliance argues that in the case of all other local refineries, for example, including the independent Cochin and Madras ones, there is no such tax levied when the products are transferred to companies such as IOC.

The point, however, is that in these cases, the governments in the states where the refineries are located have granted specific exemptions from this tax for inter-company transfers of the type that Reliance is making to IOC. But this sort of exemption is something that the Gujarat government has not granted to Reliance. What it has done instead is to defer the tax for 15 years — under this agreement, Reliance will collect whatever sales taxes accrue, keep them for 15 years, and then refund the basic amount to the government. Obviously then, the Gujarat government can either give Reliance either a deferment or a waiver — ministry officials tried to convince the Gujaratgovernment to waive the local taxes.

Another suggestion that has emanated from Reliance is that they transfer/sell their products to IOC at some point outside of Gujarat — this will then do away with the problem of the Gujarat local sales tax — and that they use IOC’s Kandla-Bhatinda pipeline to transport the products to this point. IOC says that’s fine, provided Reliance then pays for using the Kandla-Bhatinda pipeline for transporting its petroleum products. Legally, IOC officials say, if Reliance transfers the products to IOC outside Gujarat, then it belongs to Reliance in Gujarat, and so they cannot but charge Reliance for using their pipeline to transport this.