ISLAMABAD, Feb 26: The removal of premium and deemed duty on diesel and kerosene being allowed to refineries under an anomalous pricing mechanism can undo the need for a price-hike, it is learnt.

These premiums and duties are in addition to government taxes like GST, excise duty, dealer and company margins, ocean and evaporation losses, wharfage, banking costs and product handling charges that are inbuilt in the sale prices.

Sources told Dawn that the Economic Coordination Committee (ECC) of the cabinet discussed the oil pricing mechanism in its meeting on Feb 25. The meeting was informed that according to initial calculations, the withdrawal of 10 per cent deemed duty on diesel that should not have continued beyond 2006 could reduce the import parity price by Rs5.69 per litre from Rs49.74 per litre to Rs44.05.

Likewise, the import parity price of light-diesel oil could come down by Rs5.95 per litre if deemed duty is withdrawn.

Interestingly, only diesel and furnace oil are import products, but premium and duties are also charged on other products as well.

Technically, deemed duty is a replacement of customs duty on import which can be charged on locally produced products.

If the two charges are removed, the element of price differential claims payable to oil companies would stand eliminated.

The PDC amount stood at about Rs46 billion a few months ago and the government had to borrow Rs38 billion from banks.

The loan amount would increase to Rs54 at the time of repayment in five years, adding extra cost to consumers and the exchequer.

These deemed duties were allowed in 2001 for one year. Later, the then prime minister directed the petroleum ministry in February 2006 to present a plan for gradual reduction in deemed duty.

The petroleum ministry worked out the plan for reduction of deemed duty in consultation with the refining industry for incorporation in the budget 2007-08, but the proposal could not become part of the budget proposals.

These sources said the new secretary of finance, Dr Waqar Masud, held detailed meetings with the petroleum ministry in recent days in which both the ministries reached an understanding that continuation of deemed duties on some petroleum products was legally anomalous and hence should be taken up with the incoming elected government for correction so that a hike in prices could be kept at the minimum possible level.

Moreover, these sources said there was a growing unrest among senior government servants about an undue charge allowed on oil products in the shape of premium that ranges between $20 and 25 per metric ton. The premiums were allowed in a regulated oil pricing regime when the government used to negotiate discounted prices with foreign oil suppliers for uninterrupted deliveries, but erroneously continued in the deregulated regime.

The finance ministry sources said if this premium on diesel at $22 per ton is also removed, the import parity price of high speed diesel and light diesel oil would fall to Rs37.73 and Rs32.57 per litre, respectively, a price at which the two products are being marketed in the country. That would mean that import parity price and consumer price would become equal even after inclusion of dealer and company margin, general sales tax, excise duties and other banking and product handling charges.Meanwhile, caretaker petroleum minister Ahsanullah Khan told the Senate on Tuesday that import cost of diesel ranged between Rs27 and 33 per litre during the entire period of 2006-07 but sale prices remained unchanged at 37.73 per litre, providing sufficient room for absorbing the higher international oil prices. The minister was responding to a question posed by Senator Talha Mahmood.