Indian Oil Corp may go to court if the Odisha government carries out its threat to withdraw tax incentive to its Paradip refinery, in a confrontation that could dent the state’s credibility as an investment destination. Odisha issued a notice to IOC last month, saying the economic environment had “drastically changed in favour of Indian Oil Corp” so that a fiscal incentive for Paradip refinery has become “unnecessary and unjustified”.
It cited deregulation of fuel prices, expanding refining margins and profitability of Indian Oil Corp, capacity expansion at the refinery, and delay in building it, as the key reasons for seeking to withdraw tax sops. In its response, Indian Oil has rejected all arguments by the state and said it was “not fair” to withdraw tax incentive now. If it must withdraw the incentive, then the state government “shall accept interest free unsecured bonds of Indian Oil Corp or alternative entity payable at par without interest after ninety-nine years of their issue in full settlement of tax(es)/duty(ies)/charge( s)”, the company has written to Odisha, quoting the provision from the agreement between the state and IOC, which provides for fiscal incentives.
A person close to IOC management said, “If Odisha doesn’t stick to the terms of the agreement, Indian Oil will have no option but to go to court to enforce that.” The person said such a move will impact the state’s credibility. “It’s painful. Business cannot go on like this. If governments go back on the commitment, it would be extremely difficult to trust governments,” the person said. Odisha in its notice had said it would lose revenue of Rs 227.45 billion on the present value basis by allowing Indian Oil to defer paying VAT on the refinery’s entire produce sold in the state for the first 11 years of commercial production, Indian Oil has rejected this estimation and pegged the amount at Rs 80-90 billion.
In the notice, the state also targeted the Centre for allegedly not extending sops while expecting to collect Rs 83,111crore over the first 11 years of the refinery – a mild reference to the political rivalry between Biju Janata Dal that rules Odisha and Bharatiya Janata Party, which controls the central government and has Dharmendra Pradhan from Odisha as the oil minister. Big industrial projects, expected to generate jobs and voters’ goodwill, frequently become theatres of political squabbling. Last year, the Paradip refinery was inaugurated by Prime Minister Narendra Modi at a function that resembled a rally.
Odisha offered incentives in 2004 to lure IOC to build a refinery in the state that could generate jobs and boost economic activity. That was after a round of flip flop by the state, which first offered the incentive in 1998 but withdrew it two years later, prompting the company to walk out saying the refinery was not viable without financial support from the state. Odisha returned in 2004 with fiscal incentives, including waivers on entry tax on materials, machinery and equipment needed for construction of the plant, and deferral of VAT on refinery produce sold in the state for the first 11 years of commercial production.