Government intends to tax branded petrol and seeks response from public
Here is some shocking news for Oil companies. The prices of Branded Petrol and Diesel may shoot up like anything with the proposed levy of excise duty on these products. Of late, the Petro companies started selling what they call premium grade Petrol and Diesel which they claim to give more mileage and improve the engine performance. The price of these branded fuels is slightly more than the ordinary petrol/diesel. The process involved in manufacture (?) of these products is rather simple. The normal petrol/diesel manufactured in the refineries is mixed with some additives which normally takes place at the Oil marketing terminals. Till the warehousing provisions were in force, the value addition was taxed as the marketing terminals were registered with excise department and duty was being paid at the Terminals on the non-duty paid goods received from the refineries. In a rather hasty move, the Government had withdrawn the age old warehousing facility for terminals in 2004 with a view to include the "transit loses" form the refineries to terminals in the duty ambit. As a result, all the refineries are clearing the goods to the terminals only on payment of duty and there is no duty payment from the terminals. After the withdrawal of the warehousing provisions, what is the position of the Terminals with regard to braded petrol? Since the mixing of normal petrol with the additives is done at the terminals, whether they should pay duty again on "duty paid petrol/diesel"?
TIOL raised this important issue immediately after the withdrawal of the warehousing provisions. Please see our Editorial
Now the Government comes up with a draft circular to tax the branded petrol and the value addition thereof and solicits public response. The draft Circular clarifies that the process of mixing of additives in normal petrol/diesel results in emergence of a new product having a distinct name, character, and use, and as such the said process should be treated as a process amounting to 'manufacture' and proposes to tax the value addition.
This Draft Circular raises some important questions :
++ If the mixing is done at the Terminals, where the duty paid normal Petrol/Diesel are received from the refineries, they have to pay duty on the Branded Petrol/Diesel again. The terminals cannot take Cenvat Credit on duty paid petrol and diesel as these two products are excluded from the definition of inputs in Cenvat Credit Rules. So, with the proposed move, not the "Value addition" alone is taxed, but the entire value of normal petrol/diesel is taxed TWICE!
++ Same is the case if the Branded Petrol is manufactured in the refinery itself as Petrol and Diesel are excluded from the inputs under Notification 67/95 CE.
++ Draft Circular says the pending disputes may be decided accordingly. Since the Circular dated 13.12.1994 will be in force till the draft circular is issued, what does the Board mean by "pending disputes may be decided accordingly?" Does it mean the benefit of Circular dated 13.12.1994 is to be extended for the period prior to the issue of the new Circular or not? Otherwise, how can the Oil companies expect in 2004 that in 2007, Board will suddenly announce that the duty has to be paid on Branded Petrol/Diesel?
++ The draft Circular says the earlier Circular issued on 13.12.1994 stands withdrawn. Vide Circular dated 13.12.1994, it was clarified that the process of mixing/blending 3% duty-paid methanol with 97% duty-paid motor spirit does not amount to `manufacture'. This Circular was issued based on the report by the Chief Chemist, CRCL, New Delhi. How this report becomes irrelevant now? The draft circular does not explain.
++ When it was clarified in 1994 that the process on blending methanol does not amount to manufacture, how the exemption notification were issued for ethanol blended petrol in 2002?
++ Is an important issue whether certain process amounts to manufacture or not left to the Board to decide?
It is good that the Board has decided to solicit the public response instead of issuing the Circular straight away. Obviously the Circular in its present form will create lot of confusion and does not address the problem from all dimensions, the most important aspect being non availability of Cenvat credit and captive consumption benefit. Further, there is a stay and full waiver of pre-deposit by Mumbai Bench of the CESTAT in case of demand on ethanol blended petrol in respect of M/s Reliance Industries Ltd (2006-TIOL-1966-CESTAT-MUM ).
All the tax consultants must be grateful to the good Board for ensuring them good business throughout the year and years to come.
CBEC Draft Circular in F.No.83/04/2007-CX.3