Odisha govt withdraws tax sops to Indian Oil Corp's Rs 34,555 crore Pradip refinery

In a big jolt to Indian Oil, the Odisha government has withdrawn tax incentives given to the Rs 34,555-crore Paradip refinery, making the company reconsider its plans to invest another Rs 52,000 crore in the state.

Less than two months after serving the first show-cause notice, the Odisha government on February 22 wrote to its single-biggest investor saying it is withdrawing the promised 11-year deferment on payment of sales tax on Paradip refinery products sold in the state, sources said.

The withdrawal will cost Rs 2,000 crore to Indian Oil Corporation (IOC) this year and will progressively increase every year as more petrol and diesel as also petrochemicals are sold within the state.

The sources said that besides leading to levy of sales tax on 2 million tonnes of petrol and diesel sold in the state annually, the withdrawal is threatening viability of investments in downstream petrochemical plants as products from it will be consumed by an array of synthetic fibre and plastic industries and now tax will also be levied on them.

When asked, IOC Director (Refineries) Sanjiv Singh said he would not like to discuss merits of the state government's decision in the media.

"IOC had invested about Rs 50,000 crore in Paradip refinery on the Odisha coast and in associated projects (like pipelines and port). We had plans for more investment, especially in downstream petrochemical projects and refinery expansion, considering the incentives given by the state. But in the present scenario, future investment options will require to be reassessed," he said.

IOC plans to expand the 15-mt-a-year Paradip refinery by 5 million tonnes as well as set up a polypropylene plant and a monoethylene glycol production facility at the site of the 1-year old refinery.

He hoped Odisha will reconsider the decision and restore the incentives that were mutually agreed upon in 2004.

Odisha had originally offered the tax incentives to IOC and its then partner Kuwait Petroleum Corp (KPC) in December 1998 to invest in setting up a refinery in the state. These investments were withdrawn in February 2000, leading to the company shelving the project.

It restored the incentives and signed an MoU with IOC on February 16, 2004, for providing a set of eight sops.

The sources said the state government withdrew the tax incentives in "public interest", citing 6-year delay in commissioning of the project that was larger in capacity than originally planned 9-mt plant.

IOC, however, is quick to point out that the February 16, 2004, MoU clearly allowed change in design, capacity and configuration of the project.

Sources said the Odisha government was informed about the change in capacity and the delay in construction caused by cyclone, land acquisition and law and order problems. Also, the state government had allowed the company to avail of construction period incentive, listed in the MoU, totalling Rs 550 crore.

Singh said restoration of the tax incentives will send a positive signal to prospective investors in the state. "Paradip refinery has already added to the overall development of the area in and around Paradip," he added.