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Days after the government announced it has successfully resolved the dispute between Indian Oil Corp (IOC) and Odisha government over tax incentives for the flagship Rs 40,000 crore Paradip refinery project, expert opinion on the whether the resolution benefits the nation’s largest fuel retailer remains divided.
The two sides had signed an agreement in 2004 under which the state government had promised VAT deferral on sale of products for 11 years to IOC for setting up the 9 MTPA refinery. In February this year, Odisha withdrew the tax incentive citing a six-year delay in the commissioning of the project and also the change in capacity to 15 MTPA, triggering the dispute.
The issue was resolved with the oil ministry’s intervention earlier this month. Under the revised terms, Odisha agreed to provide Rs 700 crore interest-free loan to IOC annually for 15 years as Viability Gap Funding (VGF) starting 2016-17 while IOC will deposit applicable VAT on products sold. The tax not paid in 2015-16, 2016-17 and 2017-18 will be deposited immediately.
At least one expert said the resolution effectively curtails the company’s cash flow by Rs 6,075 crore. This has been calculated as the difference of the Net Present Value (NPV) of the cash flow that could have been available to IOC as per the 11-year Value Added Tax (VAT) deferral provided in the original 2004 deal and that available from the annual Rs 700 crore interest-free loan provided under the revised agreement.
“Under the earlier terms, the company is assumed to gain Rs 2,400 crore annually as tax deferral for 11 years. The NPV of this cash flow at a rate of 10 percent is estimated to be Rs 10,124 crore. Under the new terms, the company gets Rs 700 crore per annum for 15 years. The NPV of this cash flow at a rate of 10 per cent is estimated to be Rs 4,049 core,” the expert, an analyst with an accounting and consultancy firm, said requesting anonymity. “Therefore, in current scenario, IOCL is getting Rs 6,075 crore less incentive than the earlier case,” he added.
Another expert disagreed with the contention of any negative impact on IOC under the revised terms. “One has to look at the flipside of the argument also, which is that IOC is better off getting at least Rs 700 crore annual interest-free loan as against the situation a few months back when the state was refusing to extend any incentive at all. Also, the larger picture is that this resolution works amicably for both the parties. After all, IOC has huge expansion plans in Odisha and particularly for the Paradip refinery,” said the expert, an analyst at another accounting and consultancy firm, asking not to be named
A third expert, a senior executive tracking the Oil & Gas sector at a domestic brokerage, agreed with this view. “IOC has already committed large investments in Odisha and that requires the state government to be on board. If the company was to insist on the old demand (11-year tax deferment), things would have still been in a stalemate,” he said.
An email questionnaire sent to IOC seeking comments on the impact of the new terms of the deal remained unanswered. However, a senior IOC executive said the tax outgo for three years (2015-16, 2016-17 and 2017-18) works out to around Rs 4,800 crore and will be paid within the current quarter. The tax outgo, however, is unlikely to impact profitability as it is accounted as expenditure under the head of deferred tax.
“As the refinery became operational in December 2015, the VAT payable for 2015-16 comes to approximately Rs 210 crore, for 2016-2017 it comes to Rs 2,200 crore and for the current financial year we have to pay Rs 2,400 crore. The amount will go up as more products are sold in the state,” he said, asking not to be named. The executive informed around three million tonne petroleum products are sold in Odisha which constitutes 20 percent of the refinery’s product sales.
Paradip Refinery Tax Dispute: A Timeline
Would the Paradip refinery tax issue resolution benefit IOC?
Announcing the resolution of the dispute on 19 August following a meeting with Odisha Chief Minister Naveen Patnaik, oil minister Dharmendra Pradhan had called it a “historic day” for the people of Odisha. “It is agreed that state government will give Rs 700 crore per annum interest-free loan for 15 years; earlier state had agreed to provide total deferment of VAT. This would give a substantial amount of additional revenue (Around Rs 1,500 crore per year) to the state of Odisha,” Pradhan had said in a tweet.
A joint petition is now to be filed in the Orissa High Court informing about the resolution. With the Paradip refinery dispute resolved, IOC is currently planning to invest over Rs 52,000 crore in expanding the project by additional 5 MTPA and setting up an associated petrochemical complex including setting up a Polypropylene plant and a Mono-ethylene glycol production unit in 4-5 years.
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