Ethanol (primarily a by product from sugarcane and residue of rice and wheat) is mixed with Petrol in the range of 5% to 10% as of now and on world environment day (05.06.2021) PM announced to increase the same to 20% by 2025 for petrol and to mix the same upto 10% in case of diesel by 2030.
The Govt is also pushing the automakers to develop engines which can accommodate fuel with 20% to 100% blended ethanol.
The following are the advantages of ethanol mixed fuel (petrol or diesel)
i. It reduces level of pollution (as oxygen present in ethanol allows 100% of fuel to be burnt)
ii. It reduces import dependency for crude oil and reduces foreign exchange outflow for Import and improves balance of payment for country
iii. It help farmers to earn additional revenue.
Whether mixing of ethanol with petrol amount to manufacturing or not is an old dispute between excise department and oil marketing companies.
Before going into dispute part let’s understand the process followed by oil companies for mixing of ethanol with petrol.
The ethanol is generally mixed with Petrol by oil marketing companies (like Reliance, IOCL, HPCL, BPCL etc) at following locations:
i. At refinery
ii. At storage locations after receiving the product from refinery.
1) Supply ex- Refinery:
We know excise duty is applicable on manufacturing and there is no doubt that in the process of conversion of crude oil into petrol/ Diesel manufacturing is involved.
The rate of excise duty as on date (w.e.f 04.11.2021) is as below:
| (Rate per litre) | ||||
| Particulars | Petrol (Branded) (Rs per litre) | Petrol (Un-Branded) | Diesel (Branded) | Diesel (Un-branded) |
| Basic Excise Duty- | 2.60 | 1.40 | 4.20 | 1.80 |
| Additional Excise Duty (Road and Infrastructure Cess) | 13.00 | 13.00 | 8.00 | 8.00 |
| Special Additional Excise Duty | 11.00 | 11.00 | 8.00 | 8.00 |
| Additional Excise Duty (Agriculture Infrastructure and Development Cess) | 2.50 | 2.50 | 4.00 | 4.00 |
| Total | 29.10 | 27.90 | 24.20 | 21.80 |
As can be seen from above table the rate of excise duty is fixed rate per litre (i.e Rs 27.90 for unbranded petrol).
So say for example: If 1000 litre of blended petrol (consisting of 950 litre of pure petrol and 50 litre of ethanol) is removed from refinery for sale then a question arises whether refinery will pay
a) excise duty on 1000 litres of petrol @ Rs 27.90 (i.e Rs 27900) or
b) excise duty on 950 litres of petrol @ Rs 27.90 (i.e Rs 26505)
If the blending of ethanol with petrol amount to manufacturing then option (a) will be applicable (i.e excise duty of Rs 27900).
However if blending of ethanol with petrol does not amount to manufacturing then option (b) will be applicable (i.e Excise duty of Rs 26505)
Via Circular No.83/83/94-CX dated 13.12.1994 it was clarified that blending of methanol with Petrol does not amount to manufacture as no new product emerges by way of mixing of methanol with petrol.
In the case of Hindustan Petroleum Corporation … vs C.C.E., Delhi … on 23 March, 2012 it was held that even mixing of additive with petrol / diesel to make it branded fuel (like speed, Turbo etc) does not amount to manufacturing and hence no excise duty is payable for such mixing process.
Beside it via Circular No. 1078/02/2021 – CX dated 22.06.2021 it has been categorically clarified that option (b) will be applicable (i.e oil company need to pay excise duty of pure petrol portion and applicable GST on value of Ethanol)
Hence we can conclude that in above case option (b) will be applicable (i.e Excise duty of Rs 26505)
It may be noted that Input Tax credit on GST paid on purchase of Ethanol will not be available since covered under section 17(5) of CGST Act 2017.
On the above supply applicable VAT of respective state is charged if the supply is made directly to customers and no VAT / CST is applicable if supply is made on stock transfer basis subject to fulfillment of conditions as specified in VAT acts of respective states. (It may be noted that VAT / CST is still applicable on 5 products -petrol , diesel, ATF, Natural Gas and alcoholic liquor for human consumption)
2) Supply from storage locations after receiving the product from refinery.
The mixing of Ethanol with petrol is also done at storage locations (known as Depot) by oil companies.
The process is simple in which a small tank of Ethanol is placed along with pure petrol tank. At the time of loading, two separate pipelines (one for pure petrol and another for ethanol) is used for filling the tank lorries and mixing of these two happens during filling the tank lorries.
Since mixing of ethanol with petrol does not amount to manufacturing so no excise registration is required for these storage locations and no excise duty is paid at these storage locations.
While delivering these blended petrol, storage locations charge VAT /CST of respective state if the supply is made directly to customer and no VAT / CST is applicable if supply is made on stock transfer basis subject to fulfillment of conditions as specified in VAT acts of respective states.
In this case no GST is applicable on sale of Ethanol (mixed with petrol) since ethanol cease to exist at the time of selling petrol and petrol is exempted product under GST. However no Input Tax Credit is available on purchase of Ethanol by these storage locations since covered under section 17(5) of CGST Act 2017.
The above can be summarized as below:
| Supply location | Excise duty | GST payable on Ethanol portion of supply | ITC of GST paid on Ethanol Available | VAT / CST payable |
| Supply Ex-Refinery | Paid on pure petrol portion of ethanol blended petrol (i.e excluding ethanol quantity) | No since EBMS (Ethanol Blended Motor Spirit) is composite supply and petrol/ Motor spirit not covered under GST | Not available, u/s 17(5) of CGST Act 2017 | Yes, based on rate of tax of respective states. However not payable on stock transfers |
| Supply from storage locations | Not applicable since no manufacturing at Storage location is involved | No since EBMS (Ethanol Blended Motor Spirit) is composite supply and petrol/ Motor spirit not covered under GST | Not available, u/s 17(5) of CGST Act 2017 | Yes, based on rate of tax of respective states. However not payable on stock transfers |
New strategy/ attempt to levy Excise duty on ethanol portion of Petrol (unjust enrichment)
It may be noted that though it has been decided in the year 1994 that mixing of methanol with petrol does not amount to manufacturing time and again excise department tried different avenues to impose excise duty on this ethanol portion.
This is evident from the numerous case laws decided by courts post 1994. Even the recent Circular No. 1078/02/2021 – CX dated 22.06.2021 also tries to remove the ambiguity on the same to reduce litigations.
A view of unjust enrichment can be used to collect excise duty on ethanol portion of petrol.
Let’s understand the concept of unjust enrichment.
Unjust enrichment is said to occur when any amount is collected in the name of tax but the same is not paid to Govt ex-chequer.
For example : An unregistered dealer under GST collected Rs 10,000 as his fees plus Rs 1,800 in name of GST (i.e total Rs 11,800) from his customer. Since he is unregistered dealer he is not supposed to collect and pay GST. However if he collects any amount (in this case Rs 1800) in name of GST then he need to pay this amount to Govt –exchequer (even though he is unregistered under GST) since it’s a case of unjust enrichment.
We know pricing of petrol/ diesel etc is done as per MOPNG (Ministry of Petroleum and Natural Gas) guidelines. Though pricing of petroleum product is free (i.e not regulated).
While arriving at the final price of petrol for consumer (which varies from state to state on account of state VAT rates, transportation cost from refinery etc) excise duty is added to base price before excise duty.
We have seen that excise duty in case of petrol is not ad-valorem (i.e not percentage based) and is fixed amount (i.e Rs 27.90 for unbranded petrol).
So while determining price the whole excise duty of Rs 27.90 is added to price before excise duty (i.e base price) and after adding excise duty applicable margin and VAT is levied.
For example: the break up of selling price be as below:
| Particulars | Petrol (Un-Branded) (per litre) |
| Base price before Excise (say) | 35.00 |
| Total Excise duty | 27.90 |
| Margin and other elements (say) | 5.00 |
| 67.90 | |
| Add: VAT (say 25%) | 16.98 |
| Selling price (per litre) | 84.88 |
From the above example we can see that whole excise duty of Rs 27.90 (and not 95% of 27.90 i.e 26.50 – assuming 5% ethanol is blended) is added while determining final sale price. However only Rs 26.50 per litre is paid as excise duty.
So one view can be taken that Rs 1.40 per litre (i.e Rs 27.90 – Rs 26.50) is collected by oil companies in the name of excise duty, however the same is not paid to Govt exchequer and hence this excise duty of Rs 1.40 per litre can be treated as unjust enrichment.
However it can be noted that nothing is recovered in the name of excise duty from the customers (petrol pumps) directly on the face of invoice. The pricing may have numerous elements (like transportation cost, normal loss, product cost, tax, margin etc).
So background working of pricing is an internal document for the company and unless anything in the name of tax is collected directly, then it’s not a fit case for unjust enrichment.
For example: A unregistered chartered account can raise the bill on his client in following two manners:
| Particulars | Case I | Case II |
| Fess for Professional services | 10,000 | 11,800 |
| GST @ 18% | 1,800 | |
| Total Bill Amount | 11,800 | 11,800 |
In above example case I is a pure case of unjust enrichment since an unregistered dealer is not supposed to collect GST. However case II is not falling under unjust enrichment since nothing is collected from client in the name of tax on the face of his invoice.
So according to personal opinion of author, even if oil companies collect full amount of excise duty on petrol while calculating prices of petrol, they are not under obligation to pay excise duty on ethanol blended portion by applying the concept of unjust enrichment.
However it would be interesting to see the view of the courts when it comes for their review.
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