Finance Minister Arun Jaitley may look at re-imposing five per cent customs duty on crude oil imports to shore up revenues by US $3 billion and create a level-playing field for domestic producers.
Presently, the government does not levy any import or customs duty on crude oil imports. On the other hand, domestically produced crude oil attracts two per cent central sales tax, which imported oil is exempted from.
Given that there is no customs duty on imported crude oil, the Central Sales Tax (CST) levy places domestic producers at a significant disadvantage vis-a-vis imported crude, government sources said.
Thus, 20 per cent of the domestic crude oil consumption that comes from the country's oil fields is taxed, whereas 80 per cent of imported oil goes untaxed.
Jaitley, in his first full-year Budget on February 28, may seek to address the anomaly, they said.
Options before the Finance Ministry are either to remove the CST imposed on domestic crude, thus incentivising domestic explorers. Alternatively, taking benefit of the current low oil prices, the government can re-introduce customs duty on crude oil imports.
At five per cent basic customs duty, the government will earn over US $3 billion on an annualised basis.
Higher revenues from customs levy will aid the government in meeting its fiscal deficit target.
The government collected US $125 million in CST on 65.7 million barrels of domestically produced crude oil. In the first 10 months of current 2014-15 financial year, US $87 million was collected on 53.3 million barrels of production.
Sources said the increase in customs duty will be in line with the long-standing policy of tax rationalisation. Over the past several years, customs duty on imported crude oil has always been utilised as an effective lever to modulate crude oil prices and raise revenue.
The government may choose to lower the customs duty when international oil prices rise and shield consumers.
Additionally, introducing parity between imported and domestic crude oil will send the right policy signals to current and future investors in the country's upstream sector.
Domestic exploration and production sector would get a boost when they are assured that they will not be placed at a disadvantage vis-a-vis imports, they added.