IndianOil may hike fuel prices in UP if state doesn't scrap entry fee
New Delhi   15-May-2012

State-run IndianOil has told Uttar Pradesh chief minister Akhilesh Yadav that it will be forced to raise fuel price in the state unless the entry tax, which has put a burden of 8,600 crore on the cash-strapped firm, is withdrawn.

IndianOil is planning to raise petrol and diesel prices by more than 2 a litre, kerosene by 0.92 a litre and cooking gas by 19.49 per cylinder in the state. The increase is partly to pass on the entry tax to customers and partly to recover dues accumulated in the last five years, company executives said.

Prices of petroleum products sold to neighbouring states from Mathura refinery could also be raised, executives said.

In 2007, the UP government imposed 5% tax on transporting crude oil to IndianOil's Mathura refinery but the tax was not passed on to customers because of a stay order from the Allahabad high court, company executives said. In January 2012, an interim order of the Supreme Court directed the company to pay the tax and deposit 50% of the past dues with interest, pending a final verdict.

IndianOil would ideally want the state government to withdraw the tax, which would cost it 1,650 crore annually, executives said. "The fuel market is highly price sensitive. If IndianOil raises fuel price, customers' loyalty would shift to the petrol pumps, where fuel would be cheaper," one executive said requesting anonymity. Private firms, such as Essar and Reliance Industries, also have pumps in the state.

IndianOil director-finance PK Goyal said the tax incidence would be about $6 per barrel on the Mathura refinery, where gross refinery margin is about $3.3 per barrel. "Unless we raise prices of refined products, this levy would turn the Mathura refinery unviable with a negative margin of about $4.7/barrel," Goyal said.

The company could not pass on the tax to consumers until January this year because the matter was pending in the Allahabad high court, which later upheld the levy. IndianOil filed an appeal in the apex court, which on January 17 stayed the high court's order but asked IndianOil to deposit 50% of the arrears since 2007 and furnish bank guarantee for the balance amount pending its final verdict, IndianOil executives said.

IndianOil could not raise fuel prices after the apex court verdict, as it needed informal approval of the oil ministry for raising prices in the politically sensitive state. But oil ministry officials said IndianOil should take decision in its commercial interests. "If the UP government wants to save its consumers from an imminent price hike, it should withdraw the entry tax," a ministry official said requesting anonymity. "The company is armed with legal opinion of the Solicitor General of India in this matter and it is well within its rights in recovering increased cost of petroleum products, retrospectively," the oil ministry official said.