The finance ministry is considering a proposal to cut duties on kerosene sold through the public distribution system and domestic liquefied petroleum gas.

This will help public sector oil companies improve their finances, which have been hit because of under-recoveries from the sale of the two subsidised products.

Senior officials working with the oil companies said the government had made it clear that any increase in the retail prices of the domestic fuels was possible only after the general elections next year. Thus, the government will reduce duties on the two fuels to help the companies.

The officials, however, said the finance ministry had not yet decided on the quantum of the duty relief to be provided to the companies. Both PDS kerosene and domestic LPG attract a 10 per cent Customs duty and 16 per cent excise duty.

After the administered pricing mechanism in the oil sector was dismantled on April 1, 2002, the government had been giving a fixed subsidy on domestic LPG and PDS kerosene. This subsidy is scheduled to be phased out in five years.

While deciding on a fixed-rate subsidy on these two products, it was planned that the oil companies would be allowed to fix their retail prices in line with international prices to free them of any subsidy burden.

However, in the last financial year, oil companies were neither allowed to increase the retail prices of the two products, nor were they compensated by the government for their under-recoveries despite a sharp increase in the international prices of petroleum products.

During 2002-03, the government gave a subsidy of Rs 67.75 on every cylinder of domestic LPG and Rs 2.45 on every litre of PDS kerosene. In the current year, the subsidy on domestic LPG has been fixed at Rs 45.17 a cylinder. PDS kerosene will attract a subsidy of Rs 1.63 a litre.

In the last fiscal, the under-recovery to the oil companies because of the non-revision of prices of PDS kerosene was Rs 1.69 a litre and on domestic LPG it was Rs 62.27 a cylinder. The total under-recovery to the companies during the last financial year was Rs 5,430 crore (Rs 54.30 billion).

Based on the average international prices of the two fuels during April 2003, the under-recovery to the oil companies on account of PDS kerosene was Rs 1.41 a litre, and Rs 115.02 a cylinder for domestic LPG.