Feb 22, 2013 10:11 PM IST | Source: CNBC-TV18

Hope FM removes customs duty on imported LNG: Essar Oil

Essar Oil expects FM will eliminate custom duty on imported LNG and will provide more impetus to domestic oil and gas exploration and production entities.

Essar Oil is hoping that the Finance Minister P Chidambaram will eliminate custom duty on imported liquefied natural gas and will provide more impetus to domestic oil and gas exploration and production entities (E&P).

Currently the government charges 5 percent basic duty on imported natural gas or liquefied natural gas (LNG) while indigenously produced gas has no excise duty. Import of LNG has significantly increased over the past year due to sudden decline in the gas output from Reliance’s KG-D6 field.

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"Since we are importing gas only because we don’t have, government should consider this and remove basic custom duty on gas," Lalit Kumar Gupta, chief executive officer and managing director of Essar Oil said.

He further stressed that currently crude oil or natural gas produced by E&P entities is not subject to excise duties and hence they can not take CENVAT credit of service tax incurred for exploration and production of crude oil/natural gas.

"Government should consider their request in terms of either withdrawing the service tax or giving refund on offshore activities," he added.

To promote E&P entities the government can also give tax holidays. Any improvement in crude oil and gas production will reduce imports which will positively impact the country’s trade deficit and balance of payment.

Gupta also expects a reduction in excise duty on the branded fuels such as high speed diesel (HSD) and motor spirit (MS) products. Currently there is a huge gap in excise duties between branded and normal fuel which has severely impacted sales and marketing of premium fuels.  Branded fuels help save energy and prolong the vehicle's life. Being import dependant country,  the government should look at rationalisation of excise duty on branded fuel versus non branded fuel, Gupta said.

He welcomed the government recent initiative of deregulating diesel prices and said the further reduction in diesel subsidy is desired.

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Include gas under declared goods

Oil and gas sector has been demanding to include gas under declared goods since a long time now. Gupta pointed that currently gas is taxed at almost 14-16 percent value added tax (VAT). "If it is brought under declared goods the best it can be taxed is about 4-5 percent. Today gas has become very costly and is impacting the profitability and the cost of production of all the manufacturing sector," he said. 

Oil and Gas Sector which is one of highest revenue earner for the central and state government is expecting the finance minister to announce number of measure that will promote the sector growth.

Essar oil to bring down debt: equity to 2-2.5

Essar Oil has recently completed its captal expenditure program and hence sees no more requirement for further investment till next two years. After the recent expansion and optimisation at its refinery, the company reported sharp improvements in its gross refining margins in January. The company's GRM went up to USD 9.75 per barrel in December quarter from USD 7.9 in previous quarter and USD 2.82 a year ago. 

"The type of GRMs we have reported and the type of structural changes we have experienced because of expansion and optimisation and coal-fire our cash flows are expected to be very healthy for time to come," Gupta said.

The company will also refinance its rupee loan of about USD 2.27 billion through external commercial borrowings. This has given a confidence to the company to reduce its debt to equity ratio.

"We expect that our cash flows in next two years should be quite sufficient to bring our debt equity to a level which is acceptable to about 2-2.5 or so," Gupta concluded.

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