Cairn pipeline another road block

Cairn India’s efforts to raise the nation’s crude oil output has hit another roadblock with the Rajasthan government stopping work on a pipeline needed to transport the precious commodity to refiners saying it would result in loss of tax revenues to the state.

Though Rajasthan is not opposed to crude oil being taken to refineries outside the state for processing, it fears loss of sales tax, in the form of VAT, revenues if the delivery point of the output from Cairn’s Barmer fields is shifted.

The state government has stopped work on giving right of user (RoU) for the pipeline being built to transport the oil to Gujarat coast, official sources said.

Cairn has asked the oil ministry to shift the delivery point to Salaya in Gujarat where its proposed Rs 12,000 crore pipeline is to terminate. Shifting of the delivery point will allow Cairn and its 30% partner ONGC to recover the money spent on the pipeline from crude sales. If this is not done, the partners would have to bear the cost themselves.

The Rajasthan government has opposed this as it fears it will lose out on sales tax revenue and will be left with only royalty. Ironically, as per its argument, Gujarat — another BJP-ruled state — will end up with a windfall as it will be eligible to collect sales tax. The issue figured at the February 25 meeting of a secretaries' panel that agreed on the proposal to shift the sales point.

Indeed, oil ministry officials had told the meeting that Rajasthan government will lose out on the sales tax if the delivery point was shifted. Petroleum secretary M S Srinivasan then directed other officials to find a solution but said the decision on plans to transport crude cannot be delayed as the field development was at a “critical” stage. A suitable mechanism was sought to be developed to protect Rajasthan and guard agianst any windfall to Gujarat.

The legal opinion sought from PWC on the matter, however, contradicts the Rajasthan government stand saying any crude oil sale outside the state would be considered inter-state sale, irrespective of the delivery point and attract 3% central sales tax. The opinion says any sale that involves the movement of goods from one state to another is an inter-state transaction. Thus, even if the delivery/sale is made in state of origin, but the goods are transported outside state of origin, central sales tax (CST) is payable.

This means that irrespective of the delivery point being in Rajasthan or Gujarat, VAT does not apply as the crude oil has to be transported outside Rajasthan for refining. Central sales tax would be payable. CST is collected from the buyer and has to be deposited with government treasury in Rajasthan, the PWC legal opinion stated. CST is expected to be phased out in 2010 and replaced by goods and service tax (GST). GST is likely to be based on destination, irrespective of the delivery point being in Rajasthan or outside.