"The contribution of service tax by exploration & production (E&P) sector is not significant. E&P activities are being encouraged for the country’s oil security. The sector enjoys complete exemption from Customs and excise duties under the new exploration licensing policy (Nelp). Hence there is a strong case for exempting exploration activities from the ambit of service tax," an official said.

Petroleum sector’s service tax contribution to the Central exchequer is stated to be Rs 666 crore. Mining services (including mining of mineral oil or gas) was brought under the service tax net from June 1, 2007 through the Finance Act 2007. E&P companies like ONGC, Reliance Industries, Cairn India, GSPC and OIL are under pressure due to rising input costs.

On the refining front, the government is considering an excise duty rejig that would cost the central exchequer Rs 13,500 crore. "The decision in this regard could be taken even before the Budget as the government is considering a combination of measures to save oil companies from massive under-recoveries," an official said.

Sources said the petroleum minister has initiated a dialogue with the UPA’s allies to reach a consensus on marginal increase in retail price of auto fuel. The government intends to increase prices of petrol and diesel marginally and compensate oil companies by reducing duties.

The estimated under-recoveries by oilcos on account of keeping prices of petrol and diesel artificially low in 2007-08 is Rs 26,777 crore. Total under-recoveries are projected at Rs 54,935 crore.

Finance ministry sources said the government is also considering a proposal to treat the oil & gas sector at par with power sector for availing of the benefits under section 80IB (9) of Income Tax Act. The power sector has been granted an income tax holiday for undertaking generation & distribution activities for a period of any 10 consecutive years out of 15 years beginning with the year in which the company starts generation or distribution of power.

Oilcos, however, receive such a benefit only for a period of seven consecutive assessment years including the initial assessment year.

These companies are, however, unable to avail of this benefit for the full tenure owing to depreciation claims in the initial years.

CPM has asked the government to rationalise the tax structure on petroleum products to prevent the burden of increasing global crude prices falling on consumers. "We demand that the tax structure on petroleum products be rationalised to avoid the people being burdened by the increase in the global crude prices," senior CPM leader Sitaram Yechury said.

Finance Ministry had calculated in the last budget that the government was earning about Rs 60,000 crore annually as taxes on petroleum products, Yechury said, adding that due to the hike in global petroleum prices, this tax revenue has gone up to Rs one lakh crore. "This is an extra bonanza for the government and hence we demand rationalisation of the tax structure on petroleum products," the CPM Rajya Sabha member said.

The petroleum ministry has called for "infrastructure status" to be given to pipelines transporting crude oil and petroleum products across the country in its list of demands for the upcoming budget. The demand comes after the finance ministry gave cross-country natural gas pipelines such a status, which would exempt companies operating the pipelines from paying income tax for 10 years.

"We have renewed our call for granting infrastructure status to crude-oil and petroleum product pipelines, as we want to incentivise companies to set up pipelines on a common-carrier principle," said a senior official in the petroleum ministry.

Analysts say that the primary reason why crude oil and product pipelines have not yet be given infrastructure status was because most pipelines were being built on a captive basis.

Natural gas pipelines are laid on a common-carrier principle which allow companies, other than the owner of the pipeline, to book capacity on the pipeline, thus making them "national assets". "Giving infrastructure status to oil pipelines will give some incentives that might see a resurgence of oil pipelines on a common-carrier basis," said Kumar Manish, associate director, KPMG, a global consultancy firm.

The government had set up a company called Petronet India Ltd, promoted by Indian Oil Corporation (IOC), Hindustan Petroleum (HPCL) and Bharat petroleum (BPCL), for laying crude oil and product pipelines on a common-carrier principle. The company has various arms which operate single pipelines. These arms are joint ventures between Petronet India and other oil companies which have direct operations and markets along the pipeline’s route.

The experiment has proved to be a non-starter with Petronet India selling stake in its arms to its joint venture partners, as operations were not profitable. For example, BPCL is buying out Petronet India from Petronet CCK, a joint venture between the two companies and Kochi Refinery, a BPCL company. This will make the 292 km of product pipeline a captive one for BPCL.

The ministry has also said that oil and natural gas exploration companies should be exempted from paying service tax, which the finance ministry fixed at 12 per cent in the last budget. The oil companies have also been lobbying for exemption from service tax, arguing that their business was fraught with risk.

The revenue department, attached to the finance ministry, on the other hand, believes that the oil exploration companies can afford to pay service tax since norms under the New Exploration Licensing Policy (Nelp) allow the petroleum ministry to refund any tax the companies paid, an industry watcher said.

The oil ministry has also proposed that natural gas, liquefied natural gas (LNG) and biofuels such as ethanol and biodiesel should get declared goods status that would limit sales tax on the commodities in all status to not more than 4 per cent.

At present, natural gas and LNG attract different rates of sales tax and is as high as 20 per cent in some states. On the other hand, other fuels such as coal and crude oil, with which gas competes as a fuel, already enjoy the declared goods status.

"Gas is fast emerging as the fuel of the future," said an analyst with a global advisory firm. "People are already talking about gas replacing liquid fuels in the future, and its use needs to be incentivised."

Industry chamber, the Federation of Indian Chamber of Commerce and Industry (Ficci) had earlier this year also called for "declared goods status" for natural gas, as high and multi-point sales tax on natural gas was hurting user industries, particularly the fertiliser and power sectors, which use almost 70 per cent of the available gas in the country.

The petroleum ministry has sought key fiscal concessions for clean fuel sources like natural gas, liquefied natural gas (LNG) and bio-fuels including bio-diesel and ethanol.

The petroleum ministry has pleaded for extending the ‘goods of special importance’ status to these fuels to exclude them from the list of items liable to attract sales tax, a senior official in the ministry said.

The ministry had made this plea on the ground that granting sales tax exemption will help promote the usage of these environment-friendly fuels, the official added.

‘The ministry has urged the granting of these sops in its wish-list submitted recently to the finance ministry as the latter gears up to launch the annual exercise of union budget preparation,’ the official told.Article 286(3)(a) of the Indian constitution authorises the parliament to declare some items as ‘goods of special importance’ and to impose restrictions and conditions in regard to the power of states over levy, rates and other incidence of tax on such goods.

The ministry’s wish list also includes fiscal sops like duty exemption for importing plant and machinery for use in setting up green fuel plants.

City dwellers are paying Rs 300 for a cylinder of LPG, rural consumers are buying the same in the grey market at Rs 600-900 per cylinder. This, despite the fact that the government doles out huge subsidies to provide relief to the economically backward consumers.

Says Subir Raha of the Hinduja group: "We could start by dismantling the petroleum ministry. That is what China did and 10 years down the line China has thrown up the first trillion-dollar company." Some may disagree with the suggestion, but there are few who will not agree on the need to allow larger market play. Particularly so in the petroleum sector.

While consumers across the world, including neighbouring countries like China, Sri Lanka, Pakistan and Bangladesh, have been revising retail fuel prices, India has opted for politically palatable softer options of increasing subsidies. So while global oil prices rule at close to $100 a barrel, Indian consumers continue to buy fuel at prices pegged to less than $60 a barrel.

And what’s worse, while India may house the world’s largest refinery hub at Jamnagar, the fuel produced here cannot compete in the domestic market. RIL Essar and even coastal refineries like MRPL are looking for creating offshore markets because competing with the artificial pricing regime back home is next to impossible. There is an all round consensus in private quarters that investments in this sector would depend on the government’s future role on pricing.

Says PWC associate director Deepak Murarkar: "It is clear that the domestic fuel pricing has no direct linkage to capacity building in India. None of the new developments, especially coastal private sector ones, are oriented toward meeting the domestic demand. If transport fuel price caps are raised to turning sale in domestic market attractive for marketing companies, the producers would obviously exercise the option. Currently, they are extremely unattractive."

Says Hardy Oil and Gas V-P Ashu Sagar: "To be a refinery hub you need to be a crude producer, or a shipping hub for oil tankers or a marketplace for oil trade. We are none of these." Says former power secretary RV Shahi: "Market forces can have a play only when demand and supply match. In a market like ours, the regulator needs to take a proactive role in setting prices. Once competition kicks in true prices would follow.