New Delhi: The government’s plan to insulate the economy from the volatile oil price by creating a strategic buffer has run into a regulatory hurdle.
The finance ministry has refused special economic zone (SEZ) status to nation’s first strategic crude oil reserve coming up in Mangalore
SEZ as the proposed reserve cannot export oil and be a net foreign exchange earner—a prerequisite to SEZ status and avail tax breaks.
SEZ units are exempt from paying all taxes, including customs, excise, service tax and income tax because they bring valuable foreign exchange.
Indian Strategic Petroleum Reserves Ltd (ISPRL), the agency that is setting up 3 strategic oil reserves in the country, recently sought a waiver from the requirement of earning foreign exchange as the oil reserve is meant for local consumption during supply disruptions and not for exports.
The proposal from the petroleum ministry received endorsement from the commerce ministry but did not cut much ice with the finance ministry. A finance ministry official not wishing to be named said the government cannot deviate from the rule as it would set a bad precedent.
The government wants to have a reserve of 5 million metric tonne in place by 2012 that can be released for local consumption whenever a sharp increase in global crude oil prices threatens to affect the cost of living, by way of costlier commodity prices, as well as burn a hole in the government’s exchequer with the oil import bill.
ISPRL is now exploring the possibility if the proposed oil reserve in Mangalore SEZ can be incorporated as a free trade warehousing zone, a source said. This would make it eligible for income tax and service tax exemptions besides deferment of customs duty. Finance ministry officials told FE that to avail these benefits ISPRL may still have to earn at least a dollar more than what it may pay in dollars for importing steel or for design services. The entity that uses the services of warehouse for storing oil will have to pay excise duty when it takes oil into the domestic area.
The location of the oil reserve was selected based on geologic investigations on the strength of underground rocks before the Mangalore site was officially declared an SEZ. “The site was selected after scientific data proved it to be the most hospitable in the region. Economics was not a consideration,” the source said. Considering the sensitivity of the oil reserve, ISPRL officials declined to comment.
The finance ministry had suggested that ISPRL could delineate the oil reserve from the SEZ. ISPRL however, is of the view that it might lead to significant delays in executing the project.
The finance ministry is concerned about SEZ units not bringing much forex earnings despite the tax breaks for export production.
Source : FinancialExpress