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 percent central sales tax, something which imported oil is exempted from.

Given that there is no customs duty on imported crude oil, the CST levy places domestic producers at a significant disadvantage vis-à-vis imported crude, government sources said.

Thus, 20 percent of India's crude oil consumption that comes from domestic oil fields is taxed, whereas 80 percent 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 is 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-introduces customs duty on crude oil imports.

At five percent basic customs duty, the government will earn more than USD 3 billion on an annualised basis.     
Higher revenues from customs levy will aid in government strategy to meet its fiscal deficit target.

The government collected USD 125 million in CST on 65.7 million barrels of domestically produced crude oil. In the first 10 months of current fiscal, USD 87 million was collected on 53.3 million barrels of production.     

Sources said the increase in customs duty will be in line with long-standing policy of tax rationalisation. Over last many 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.     

Also, introducing parity between imported and domestic crude oil will also send right policy signals to current and future investors in India'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-à-vis imports, they added.

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