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New Delhi: Odisha government’s move to withdraw tax breaks to Indian Oil Corp. Ltd’s 15 million tonne Paradip refinery is likely to cost the state about Rs50,000 crore of investments with the refinery major taking a second look at its investment plans for the state.
With the state issuing a show cause notice on withdrawing an 11-year deferment of value added tax (VAT) promised in its agreement with the company, Indian Oil is also weighing the option of issuing 99-year-interest-free bonds which the state has to compulsorily purchase as per their agreement, for financing the tax liability, a person with direct knowledge of the development said on condition of anonymity.
The notice was sent on 29 December.
Indian Oil’s two major proposed investments which will be given a second thought are a petroleum coke gasification and downstream product manufacturing capacity costing Rs15,000-20,000 crore and an expansion of the refinery itself for another Rs10,000-15,000 crore, said the person. A third project—a monoethylene glycol production facility at a cost of Rs 4,100 crore —will also be reviewed. LPG bottling plants and marketing terminals are among other planned projects that will be reconsidered.
Once the state goes back on a promised incentive, the Indian Oil board has to re-examine other pending projects by excluding any tax breaks promised for them to see if those projects are still viable, explained the person.
In its reply dated 17 January, Indian Oil informed the state that withdrawal of incentives after the refinery’s commissioning will seriously impact its viability and impact future investment plans in the downstream.
Several Indian Oil projects are already under construction in the state including a petroleum coke evacuation project, an LPG import terminal, a 670 km Paradip-Durgapur pipeline, an 1,150 km Paradip-Hyderabad petroleum product pipeline and a polypropylene plant. These are in addition to the Rs35,000 crore already invested in the 15 million tonne refinery. Apart from this, the company is also investing 38% in Adani Group’s proposed Rs5,000-crore Dhamra LNG project in the state. “These investments could transform Odisha into an advanced economy in the east coast,” said the person cited above.
The show cause notice, reviewed by Mint, made a case for withdrawing the benefit citing macroeconomic changes (relatively low oil price), which improved viability of the project even without the tax break, project delay and revenue impact of the incentive that it said hit the state’s ability to “discharge sovereign functions and obligations for public welfare.”
Saswat Mishra, commissioner of commercial taxes, Odisha, when contacted, informed Mint that the matter was being dealt with at the government level and that Indian Oil has, in its reply to the show cause notice, sought time for a detailed discussion on it. Mishra declined to comment any further.
Indian Oil’s 17 January reply explained the six year delay in commissioning the project due to local protests, theft at the site and the extra fortification required for the refinery at the cyclonic zone. The project, which was supposed to be commissioned in 2009-10, was commissioned in November 2015.
According to R. Muralidharan, senior director, Deloitte, generally, the principle of promissory estoppel—an enforceable promise—should apply as investors commit investments based on the availability of the promised benefits. “Public policy becomes an exception to this rule in rare cases, where there is a conflict between promissory estoppel and public interest and it is demonstrated to the court’s satisfaction that public interest overrides promissory estoppel,” said Muralidharan. The importance of promissory estoppel is recognized even in the proposed GST regime as the government is likely to grandfather investment-based tax benefits granted to companies under the current tax regime, added Muraldharan.
The company will also explore moving court to restore the promised benefit as the viability of the project is crucial for its ability to further invest. Although it is a profit making company, Indian Oil’s sales margins are low due to the volatility in oil prices and the thin retailing margins. Its Rs10,399 crore profit after tax for 2015-16 is just 2.6% of its Rs4 trillion revenue.
VAT liability on petroleum products sold in the state was around Rs1,650 crore in 2015-16, out of which Indian Oil claimed Rs180 crore deferment. In 2016-17, the company is claiming a deferment of close to Rs1,500 crore out of the total liability of Rs2,200 crore, considering the improvement in fuel sales.