NEW DELHI: In a big jolt to Indian Oil, the Odisha government has withdrawn tax incentives given to the Rs 34,555-crore Paradip refinery, making the company reconsider its plans to invest another Rs 52,000 crore in the state.
Less than two months after serving the first show-cause notice, the Odisha government on February 22 wrote to its single-biggest investor saying it is withdrawing the promised 11-year deferment on payment of sales tax on Paradip refinery products sold in the state, sources said.
The withdrawal will cost Rs 2,000 crore to Indian Oil Corporation (IOC) this year and will progressively increase every year as more petrol, diesel and petrochemicals are sold within the state.
The sources said that besides leading to levy of sales tax on 2 million tonnes of petrol and diesel sold in the state annually, the withdrawal is threatening viability of investments in downstream petrochemical plants as products from it will be consumed by an array of synthetic fibre and plastic industries and now tax will also be levied on them.
When asked, IOC Director (Refineries) Sanjiv Singh said he would not like to discuss merits of the state government’s decision in the media.
“IOC had invested about Rs 50,000 crore in Paradip refinery on the Odisha coast and in associated projects (like pipelines and port). We had plans for more investment, especially in downstream petrochemical projects and refinery expansion, considering the incentives given by the state. But in the present scenario, future investment options will require to be reassessed,” he said.
IOC plans to expand the 15-mt-a-year Paradip refinery by 5 million tonnes as well as set up a polypropylene plant and a monoethylene glycol production facility at the site of the 1-year old refinery.
He hoped Odisha will reconsider the decision and restore the incentives that were mutually agreed upon in 2004.
Odisha had originally offered the tax incentives to IOC and its then partner Kuwait Petroleum Corp (KPC) in December 1998 to invest in setting up a refinery in the state. These investments were withdrawn in February 2000, leading to the company shelving the project.
It restored the incentives and signed an MoU with IOC on February 16, 2004, for providing a set of eight sops.
The sources said the state government withdrew the tax incentives in “public interest”, citing 6-year delay in commissioning of the project that was larger in capacity than originally planned 9-mt plant.
IOC, however, is quick to point out that the February 16, 2004, MoU clearly allowed change in design, capacity and configuration of the project.
Sources said the Odisha government was informed about the change in capacity and the delay in construction caused by cyclone, land acquisition and law and order problems. Also, the state government had allowed the company to avail of construction period incentive, listed in the MoU, totalling Rs 550 crore.
Singh said restoration of the tax incentives will send a positive signal to prospective investors in the state. “Paradip refinery has already added to the overall development of the area in and around Paradip,” he added.
The then IOC director (refineries) Jaspal Singh, according to the sources, in 2006 had written to the state chief secretary informing IOC’s decision of considering a larger capacity refinery with the petrochemical plant.
They added that the state government did not object to increase in capacity then, and neither in 2009, when IOC finally made the investment decision for just the refinery.
If the MoU was sacrosanct, the state government should have withdrawn the concessions in 2009 itself, allowing IOC to reassess its investment plans.
As per the MoU, IOC was to commission the refinery in 2009, but actually did it in November 2015 and the state government allowed IOC to avail of construction-related sops totalling Rs 550 crore all through the six years.
On December 29, 2016, the state government had served a show-cause notice on IOC, asking why the fiscal incentives should not be withdrawn, considering that the refinery was delayed by over six years.
It feels the delay has pushed back the payback time of deferred taxes by a few years and will cost it Rs 69,000 crore. But IOC disputes this figure, saying net present value of the 11-year deferment of sales tax is Rs 10,000 crore.
IOC’s plans for Paradip also included projects to improve petrol and diesel quality to euro-VI standards by 2020.
Also, the Rs 3,500-crore polypropylene plant is already under construction and likely to be commissioned by September 2017.
Sources said the government in February 2004 had signed an agreement with IOC to give fiscal incentives for setting up a 9 million tonne a year oil refinery at Paradip by 2009-10.
However, the project was delayed and started only in early 2016.
Also, the government says the refinery was originally planned for 9 mt per annum capacity, but the actual size commissioned was 15 million tonnes.
The sources said IOC has replied to the notice saying the size of the refinery should not matter as VAT deferment is limited to 2 mt of products sold in the state.
On the delay in commissioning of the refinery, IOC said the government made clear its intention of withdrawing incentives in 2010 or 2011 itself to enable the firm to redraw its plans.
More importantly, even if the refinery was commissioned in 2009-10, the VAT deferment would have been in operation till 2020-21 and there is no case for it ending in 2016-17.
The company said the state government will not suffer any revenue loss as it will pay back the taxes after 11 years, albeit without interest on it.
IOC said its board had approved investments only in 2009 and withdrawal of VAT concession will reduce by 2 per cent, the rate of return it considered for working out the investment.
The government, the sources said, is of the opinion that the refinery no longer needs incentives as its profitability had increased due to higher capacity and low global oil prices.
IOC contended that the Paradip refinery is yet to achieve profitability on a standalone basis and that its investment in higher capacity and downstream petrochemical plants will only lead to higher economic activity and employment in the state.
Higher capacity was needed for setting up two petrochem units at an additional cost of Rs 7,250 crore.
Originally, the foundation stone of the Paradip refinery was laid by the then prime minister Atal Bihari Vajpayee on May 24, 2000.