University Of Mumbai

Project Report On: Statutory Payment of HPCL (With Reference To Tax Implications In Petroleum Sector) A Project Report Submitted In Partial Fulfillment of the Requirement For Bachelors of Management Studies Submitted By: Shimsi Suresh Thaiykandi BMS

Under Guidance Of: NEELA RADHAKRISHNAN

SIES COLLEGE OF ARTS, SCIENCE AND COMMERCE NERUL NAVI MUMBAI 400706

DECLARATION

I, SHIMSI SURESH THAIYKANDI , studying iy TYBMS of SIES (Nerul) college of arts, science and commerce, hereby declare that I have completed this project on STATUTORY PAYMENT OF HPCL(WITH REFERENCE TAX IMPLICATION IN PRTROLEUM SECTOR ) in the year 2011-2012 as per the requirement of Mumbai University as part of bms program. The information presented to this project is true and original to the best of my knowledge.

SHIMSI .S. THAIYKANDI BMS

ACKNOWLEDGEMENT
It has always been my sincere desire as a management student to get an oppournity to express my views, skills, attitude and talent which I am prefficient. A project is one such avenue through which a student who aspires to be a future manager does something creative.

I am extremely grateful to the university of Mumbai for having a prescribed this project work to me as a part of the academic requirement in the bachelor of management (BMS) course.

I wish to appreciate the S.I.E.S management for providing the state of the art facilities, the principal Rita Basu for her dynamic leadership and library staff for their support in providing academic content, and the teaching and supporting staff of S.I.E.S college, for providing the entire state of the art infrastructure and resources to enable the completion and enrichment of my project.

I wish to extend a special thanks to mu co-ordinator and project guide; Mrs:Neela Radhakrishnan without whose guidance; the project may not have taken shape. SHIMSI .S. THAIYKANDI

CERTIFICATE

This is to certify that Mr./Ms. SHIMSI.S.THAIYKANDI student of SIES(Nerul) college of arts, science and commerce has completed the project on STATUTORY PAYMENT OF HPCL(WITH REFERENCE TO TAX IMPLICATION IN PETROLEUM SECTOR) in academic year 2011-2012. The information submitted in this project is true and original to the best of my knowledge.

PROJECT GUIDE
Mrs.Neela Radhakrishnan

BMS CO-ORDINATOR
Mrs.Smitha Ramakrishnan

PRINCIPAL
Rita Basu

TABLE OF CONTENTS
Chapter No A 1 2 3 4 5 6 7 8 8.1 8.2 8.3 9 9.1 9.2 9.3 9.4 9.5 10 11 11.1 11.2 Title List of Abbreviations Executive Summary Objective of the Study Research Methodology Review of Literature Introduction to Petroleum Sector Overview of Petroleum Sector Performance of Petroleum Sector Tax implications in Petroleum Sector Introduction to Tax Payments Various Tax Payments Key Positives and Key Negatives Introduction to HPCL and its Business Introduction to Mumbai Refinery Different Products of HPCL Finance Department Structure Project Finance Department Structure Functions of Finance Department Introduction to Payments Employee Payments Employee Payroll Reimbursement 41 43 32 Page No 7 9 10 11 12 16 18 21 23

11.3 11.4 12 13 13.1 13.2 13.3 14 1 14.1 14.2 14.3 14.4 15 16 17 18 19

Cash Department Awards Vendor Payments Payments towards Statutory Authorities Excise Duty Cenvat Crude Oil Payments Project Finance Payments Milestone Payments License Payments Regular Payments Fixed Assets Capitalization Financial Analysis of the various Payments Future of the Petroleum Industry Conclusion Suggestions and Recommendations Bibliography and Webliography 69 71 73 74 76 66 51 60

LIST OF ABBREVIATIONS
Companies:
HPCL - Hindustan Petroleum Corporation Limited BPCL - Bharat Petroleum Corporation Limited IOCL - Indian Oil Corporation Limited MRPL- Mangalore Refineries Petroleum Limited ONGC Oil and Natural Gas Corporation RIL Reliance India Limited SCI Shipping Corporation of India PSU Public Sector Undertaking

Others:
MNES -Ministry of Non conventional Energy Sources MoPNG Ministry of Petroleum and Natural Gas NELP - New Exploration Licensing Policy NOC -National Oil Companies OMC -Oil Marketing Companies PetroFed - Petroleum Federation of India POL- Petroleum Oil and lubricants. FOB - Free On Board C&F Carriage and Forward

B/L Bill of Lading CAGR - Compound Annual Growth Rate E&P - Exploration and Production LNG -Liquefied Natural Gas VAT Value Added Tax MODVAT- Modified Value Added Tax CENVAT- Centralized Value Added Tax.

Units:
MCM -Million Cubic Meters MMSCMD -Million Metric standard cubic meters per day MMT -Million Metric Ton MT -Metric Ton MMTPA - Million Metric Ton Per Annum

CHAPTER 1 EXECUTIVE SUMMARY

HPCL is a Fortune 500 company, with an annual turnover of Rs. 1,08,599 Crores and sales/income from operations of Rs 1,14,889 Crores (US$ 25,306 Millions) during FY 2009-10, having about 20% Marketing share in India and a strong market infrastructure...

Hindustan Petroleum Corporation Limited Analysis Across the Oil and Gas Value Chain is an essential source for data, analysis and strategic insight into Hindustan Petroleum Corporation Limited. The report provides key information relating to oil and gas assets of the company along with its operations across the value chain. The report examines the companys business structure, operations and products, and provides an analysis of its key revenue lines. As the world nears the half-decade in the new millennium, there is no dearth of good news on the global economic front.

On sectoral basis, growth in 2010-11 was underpinned by double-digit growth in the Industry and Services sector. Crude oil prices generally remained above $55 per barrel throughout 2010-11 due to geopolitical tensions, outages in oil producing regions such as Nigeria, Alaska and tight capacity along the entire oil supply chain, be it production, refining or pipeline. The problem has been exacerbated by mismatch between installed refinery capacity and crude type. High prices have also caused a fundamental power shift in the oil industry. Resource nationalism has resurfaced with a number of oil producing states consolidating their hold on oil resources.

Increasingly, state-owned enterprises of oil consuming nations are aggressively seeking access to resources competing and co-opting with other state-owned companies. Current conditions portend high prices in near-term future also.

CHAPTER 2 OBJECTIVES OF THE STUDY

1. To analyze the present status, current trends, major issues & challenges in the growth of the Indian Petroleum Sector.

2. To study the contribution & role of Petroleum Sector on economy and its impact on other related sectors. 3. To study the Indian Petroleum sector with referenced to its Tax Implications. 4. To study what are the major factors involved in Payments in the Petroleum Sector. 5. To study the competitive market landscape for the Public Sector Units in Petroleum Sector with reference to Hindustan Petroleum Corporation Limited. 6. To know what are the various opportunities and challenges before this industry. 7. To study the effect of Tax Payments in the Petroleum Sector in India. 8. To study the overall performance of the Hindustan Petroleum Corporation Limited with referenced to tax payments.

9. To understand the drivers of various payments so as to improve the tax payment structure of HPCL.

10. To gauge the intensity of the use of various new systems for payment purposes and to enhance the image of the organization Hindustan Petroleum Corporation Limited (HPCL) among the customers by the various other public and private companies in India.

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CHAPTER 3 RESEARCH METHODOLOGY

A research methodology defines what the activity of research is, how to proceed, how to measure progress, and what constitutes success. Research Methodology can be quantitative and qualitative

Primary data The primary data to be used in this study are as follows Financial Statements of HPCL. Budget for the years 2010-2011, 2009-2010. Personal interaction with the executives. Interacting with each and every person in the finance department. References.

Secondary Data Government references on Indian Petroleum sector. Growth pattern of the sector. Books and journals on Petroleum Sector in the country. Various other statistical data related to the Petroleum Industry. Internet Industrial references.

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CHAPTER 4 REVIEW OF LITERATURE

1. Title: Govt. has big plans for energy sector

Source: Equity Master.com Summary: Energy security occupies a high priority on the government agenda. In order to accelerate hydrocarbon discoveries, increased emphasis has been laid on E&P through several rounds of NELP. They have yielded benefits in the form of huge gas discoveries in the KG basin and oil discoveries in Rajasthan.

If the ongoing NELP VII is any indication, we expect the government to continue with its policies favoring exploration activities. The midstream segment will be a direct beneficiary of increased volumes. Thus, prospects of the upstream and midstream oil and gas sector look bright.

The downstream segment however, continues to suffer on account of government regulations. Till a sustained reduction in the crude oil prices is observed, the prospects of the oil marketing companies largely hinge on adhoc government policies.

2. Title: Petroleum products: Govt readying itself for a price hike?

Author: Utpal Bhaskar Source: The Hindu Business Line Summary: With the subsidy burden continuing to grow heavier, the Government is looking at various pricing options for petroleum products. The Petroleum Ministry will make a presentation to the Energy Coordination Committee (ECC), headed by the Prime

12

Minister, Dr Manmohan Singh, on December 16, listing out the various options available to the Government.

Speaking on the sidelines of the Asian Oil and Gas Summit here on Tuesday, the Petroleum Minister, Mr. Mani Shankar Aiyar, told newspersons that a discussion paper for the ECC has been prepared detailing different options for the sector. "It also gives the implications of the various options. A decision in this regard will ultimately be taken by the Union Cabinet," he said.

Dual pricing: While Mr Aiyar declined to comment on the various options, sources said one of the suggestions likely to be made by the Ministry was for dual pricing for LPG and kerosene.

Tax components: A break-up of price components of the four petroleum productspetrol, diesel, liquefied petroleum gas (LPG) and kerosene reveals that the tax element weighs heavy on the retail price of the products, particularly petrol and diesel. The tax component is almost 55%. For diesel, the tax component in the retail price is almost 34%, with customs duty of 6% (Rs 1.81), excise duty of 17% (Rs 5.07) and sales tax of 11 per cent (Rs 3.39).

3. Title: Petroleum Industry and U.S Troops

Author: Publisher: Summary: An interesting piece deliberated by the author refers to the hegemonic attitude of the US in furthering its interest in the hydrocarbon market. The US military is an oilglutton, consuming around 150 million tonnes of oil per year. It is not surprising then that, like the weapons industry, the petroleum industry prospers on the revenue of J. Prasad and C. G. K. Nair. Tata McGraw-Hill Publishing Company Limited,

13

conflict. A real upshot of this is the repeated lobbying by a group of stakeholders in exterminating all efforts to weaken the global hydrocarbon market, for environmental or other reasons. The enlargement of the community of stakeholders has created fissures in the trading regime Middle East and Africa catering to Asian nations, while the Latin American nations (Mexico, Venezuela) supply to the United States. This rift engenders physical as well as distribution security concerns of oil resources. A concomitant issue in energy security is the volatility of prices of oil, and the declining clout of OECD nations to engage in cartelization and price-fixing. This has led to short-term price contract, with the consequence of becoming susceptible to price and supply shocks. Argument is that by annexing oil-rich regions, the US will be ensured of vital supplies, and this is the rationale for the US troops in Persian Gulf and the Central Asian region

4. Title : Oil Industry In India Author: Debesh.C.Patra OIL- Infraline Oil and Gas Exploration and Production in India. Summary: Indias effort to further consolidate its gain in the E&P sector will be ably supported by the availability of a comprehensive reference source providing information on the geology and hydrocarbon potential of Indias sedimentary basins and the profile of Indias oil and gas fields. The Oil and Gas Exploration and Production in India: A Reference Book is an effort by Infraline Energy Research Services to provide detailed information on Indias upstream sector.

The book, which provides the readers with information about the geology and hydrocarbon potential of Indias sedimentary basins, basin wise profile of Indias oil and gas fields, traces the evolution of the developments in the upstream oil and gas E&P sector and profiles the current development and future outlook, could be of particular interest to executives of oil and gas companies, investors, consultants, analysts and consumer industries.

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5. Title: Rationalise VAT on petroleum products Author: S. Dasaratharama Reddy. Summary:

For the past few years, governments run by a coalition of parties have been increasing the prices of petroleum products whenever there is an increase in the international price of crude oil. If the prices of petroleum products have to be necessarily increased, there is no reason why the increase should not be neutralised to some extent by reducing sales tax, now called VAT in some States. Petrol, diesel and kerosene suffer a heavy rate of VAT or sales tax in all the States. There is no reason why petroleum products, which play a significant role in the national economy and in interstate trade, are not included in the list of declared goods. Petroleum products were "essential commodities" for the purpose of the Essential Commodities Act, which was in force till a few years ago. Crude oil finds place in the enumeration of declared goods. Four years ago, Parliament included aviation turbine fuel sold to turbo propeller aircraft among declared goods. Petrol sold to foreign aircraft for international flights is exempt from the tax because of a notification under the Foreign Aircraft (Exemption from Taxes and Duties on Fuel and Lubricants) Act 2002 passed under Article 253 which gives power to the Union Government to legislate, irrespective of the division of powers between the Centre and the States, any law to give effect to agreements with foreign countries. Recently Parliament amended the Central Sales Tax Act to treat the sale of aviation turbine fuel to designated Indian aircraft for international flights as export sale and hence exempt from VAT. Then why this discrimination between aviation turbine fuel sold to other aircraft and kerosene used by persons below the poverty line, as well as petrol and diesel used by buses, scooters and auto rickshaws used by the common man?

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CHAPTER 5 INTRODUCTION TO INDIAN PETROLEUM SECTOR

The India Petroleum Industry is a case in point for exhibiting the giant leaps India has taken after its independence towards its march to attain a self-reliant economy.

During the Independence era of 1947, the Indian Petroleum Industry was controlled by foreign companies and India's own expertise in this sector was limited. Now, after 60 years, the Indian Petroleum Industry has become an important public sector undertaking with numerous skilled personnel and updated technology that is comparable to the best in the world. The vim and the achievement during these years is the growth of productivity in petroleum and petroleum-based products. Even the consumption has multiplied itself nearly 30 times in the post-independence era. An important advancement in the petroleum industry came with the Industrial Policy Resolution, 1956 which signified the promotion of growth of industries. The ONGC, originally set up as a Directorate in 1955, was transformed into a Commission in 1956. In 1958, the Indian Refineries Ltd., a government undertaking, came into existence.

The Indian Oil Company (IOC), also a government undertaking, was set up in 1959 with the purpose of marketing petroleum-related products. Indian Oil Corporation Ltd. was formed in 1964 with the merger of the Indian Refineries Ltd. and the Indian Oil Company Ltd. Presently, 17 refineries operate under the Indian Petroleum Industry.

16

Industry Structure:
The Indian oil and petroleum sector is under the purview of the Ministry of Petroleum and Natural Gas, The annual turnover of the industry of over $65 billion. The oil and gas sector has three sub sectors:

1. Oil and Gas Exploration and Production.

2. Oil Refining and Marketing of refined products.

3. Distribution of Natural Gas.

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CHAPTER 6 OVERVIEW OF INDIAN PETROLEUM INDUSTRY OIL INDUSTRY STRUCTURE

The Oil Industry is divided into two broad sections: * UPSTREAM: This section does Exploration and Production (E&P). DOWNSTREAM: This section does Refining and Marketing.

The various companies in INDIA are listed below:

The Indian Petroleum industry is one of the oldest in the world, with oil being struck at Makum near Margherita in Assam in 1867 nine years after Col. Drake's discovery in Titusville. The industry has come a long way since then. For nearly fifty years after independence, the oil sector in India has seen the growth of giant national oil companies in a sheltered environment. A process of transition of the sector has begun since the mid nineties, from a state of complete protection to the phase of open

18

competition. The move was inevitable if India had to attract funds and technology from abroad into our petroleum sector.

The sector in recent years has been characterized by rising consumption of oil products, declining crude production and low reserve accretion. India remains one of the least-explored countries in the world, with a well density among the lowest in the world. With demand for 100 million tonne, India is the fourth largest oil consumption zone in Asia, even though on a per capita basis the consumption is a mere 0.1 tonne, the lowest in the region- This makes the prospects of the Indian Oil industry even more exciting.

The years since independence have, however, seen the rapid growth of the upstream and downstream oil sectors. 'With more than a billion people, a structural demographic shift resulting in exploding consumption expenditure, full deregulation of a 100 m tonne market growing at twice world averages, India represents one of the most exciting oil markets in the world today' - CLSA Asia Pacific

Consider the following:

Automobile sale have been surging every year. Car sales are up by nearly 30%, heavy & medium commercial vehicle sales have climbed an even steeper 40%, and consumption of diesel and LPG are on a steep rise. Going forward, we should see much larger pick- up in sales of oil products in line with the GDP growth rate, feel analysts.

High consumption has meant high profit margins for oil companies, particularly refining majors like Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL), Indian Oil Corporation (IOC) and a host of other smaller refining companies.

Refining margins are now ruling at their highest levels over the past decade. According to analysts tracking the sector, refining margins are now at $8 per barrel, one

19

of the highest levels in many years. And these margins have stayed high despite a rise in prices of crude oil. For integrated refining & marketing companies, like HPCL, BPCL and IOC, the gains are even more substantial and their numbers may look very impressive.

Exploration:
India remains one of the least explored regions in the world with a well density of 20 per 10000km2. Of the 26 sedimentary basins, only 6 have been explored so far. The Oil and Natural Gas Corporation (ONGC) and the Oil India Limited (OIL) - the two upstream public sector oil companies- in 1981/82 had taken their search to previously unexplored areas. Number of wells drilled as well as the meter age increased. However current reserve accretion continues to be low.

Refining:
The total installed refining capacity of the 15 refineries in the country at the end of March 1998 was 69.140 million tonnes per annum and the total is expected to go up to 131 mt pa by the year 2001/02. The expected increase in refining capacity should be sufficient to meet the growth in petroleum product demand (112 mtpa by the end of the ninth plan) with minimum level of imports.

The Sub-group on refining has suggested certain financial incentives for the efficient functioning of the refining sector and enhancing private sector participation during the Ninth five year plan period. In order to increase capacity utilisation of the existing refineries, 11 new crude pipelines have been proposed by the Sub-group.

In addition, there is an urgent need to reduce fuel loss in refineries, which reached a level of 7.1% in 1985/86 and declining marginally to 6.1% in 1996/97. To reduce energy consumption, projects amounting to Rs 7200 million have been identified, which on implementation, will achieve a saving of 186000 tonnes per annum (tpa).

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CHAPTER 7 PERFORMANCE OF INDIAN PETROLEUM INDUSTRY

The petroleum industry in India stands out as an example of the strides made by the country in its march towards economic self-reliance. At the time of Independence in 1947, the industry was controlled by international companies. Indigenous expertise was scarce, if not non-existent. Today, a little over 50 years later, the industry is largely in the public domain with skills and technical know-how comparable to the highest international standards. The testimony of its vigour and success during the past five decades is the significant increase in crude oil production from 0.25 to 33 million tonnes per annum and refining capacity from 0.3 to 103 million metric tonnes per annum (mmt pa). The consumption of petroleum products has grown 30 times in the last 50 years from 3 million tonnes during 1948-49 to about 91 million tonnes in 1998-99. A vast network of over 29,000 dealerships and distributorships has been developed backed by over 400 storage points over the years to serve the people even in the remote and once-inaccessible areas.

A major boost to the oil industry came in pursuance of the Industrial Policy Resolution, 1956 that intended to promote growth of the vital sectors such as petroleum under the state control. ONGC, which was formed as a Directorate in 1955, became a Commission in 1956. Indian Refineries Ltd., a Government company, was set up in 1958. In 1959, the Indian Oil Company (IOC), again a wholly-owned Government company, was formed for marketing of petroleum products. Indian Refineries Ltd. was merged with Indian Oil Company Ltd. to form Indian Oil Corporation Ltd. in September, 1964.

Unlike at the time of Independence when there were no specialised petroleum bodies or institutions worth mentioning to provide developmental support to the petroleum industry in the country, there are today several such institutions such as the Indian Institute of Petroleum, Oil Coordination Committee, Petroleum Conservation

21

Research Association, Oil Industry Safety Directorate, Centre for High Technology and Directorate General of Hydrocarbons.

In addition, oil companies have set up research and development centres such as the one established by the Indian Oil Corporation in Faridabad which have done pioneering work in formulation of lubricants and greases.

The real growth in exploration and production sector began after the discoveries by Burmah Oil Company in the fifties prompting the Government to establish Oil & Natural Gas Commission in 1956 and Oil India Ltd. in 1959.

The Advantages of Manufacturing High Class Of Petroleum Products In India:

Friendly government of India policies Low cost labor Low and world class infrastructure Strong technical education Large number of science and engineering graduates Quality output Highly skilled workforce Usage of innovative process Good client relationships Huge scope for innovation Expansion of existing relationships Huge demand in overseas markets Availability of more technical work force Increased number and quality of training facilities

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CHAPTER 8 TAX IMPLICATIONS IN THE PETROLEUM SECTOR

8.1

INTRODUCTION TO TAX PAYMENTS

Taxes are one of the major sources of revenue available to the government for

finance in its welfare and developmental programmes. They are also a tool in the hands of the government for promoting efficiency and affordability of various products. In the light of these, one needs to see if the present taxation system has been able to achieve any of the above objectives.

India just had one of the steepest increases in the prices of two crucial petroleum products petrol and diesel. It is often stated that the reason for this increase is high international crude oil price. However, the price rise is also an outcome of the cascading effect of taxes.

The petroleum sector accounts for nearly 40% of the total central excise revenues, with petrol (32%) and diesel (36%) being the biggest contributors. There is high incidence of taxes in the price build-up of these fuels; as a matter of fact, taxes account for around half of the total price in case of petrol and a third in case of diesel. Despite such high taxes, consumers have not shifted to a more efficient mode of transportation.

As a result, the consumption of petrol has increased. In fact, in 2010-11, there was a 8% rise in the sale of petrol compared with the previous year. Taxes in the petroleum sector have also been used by the government to increase access and affordability of households to cleaner and better fuels-kerosene and LPG. Both these products do not attract any excise duty and the sales tax is also marginal in comparison to diesel and petrol.

23

Finally, there is an urgent need to change the subsidy delivery mechanism, especially for kerosene, wherein the subsidy is being provided to the entire distribution chain rather than the end consumer.

8.2

VARIOUS TAXES LEVIED ON THE PETROLEUM SECTOR

Current Indirect Tax Structure

1. Central Taxes: Customs Duty -tax on imports Excise Duty CENVAT -tax on manufacture Service Tax -tax on specified services

2. State Taxes: Central Sales Tax (CST) tax on inter-State sale of goods State Value Added Tax/State Sales Tax -tax on intra-State sale of goods Works Contract Tax -tax on contracts involving sale of goods and services Entry Tax -tax on entry of goods into a State Other local levies

8.2.1

EXCISE
Excise duty is a levy of payment on the production function of the

organization. It is an indirect tax levied on goods manufactured in India. The tax is administered by the central government under the authority of entry 84 of the union list (list 1) under the seventh schedule read with the article 246 of the constitution of

24

India. The central duty is levied in terms of the Central Excise Act 1944 and the rates of duty are prescribed under the schedule of the Central Excise Act 1985.

CUSTOMS
Duties of Customs become payable when there is import into India. Accordingly, customs duty would be levied on such goods and the amount of duty has to be determined. There are several types of duties leviable on import and there are prescribed methods of computation of duties. It is useful to consider the following steps in determining the amount of duty payable. (1) Obtain the Tariff Classification of goods. (2) Compute the (i) Basic Customs Duty, (ii) Surcharge (iii) Additional Duty of Customs (equal to excise duty) and (iv) Special Additional Duty. (3) Determine if there are any additional levies under different statutes (4) Whether there are concessions and exemptions available on the item.

8.2.1

VAT
Value Added Tax (VAT) is a general consumption tax assessed on the value

added to goods and services. It is a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services. It is a consumption tax because it is borne ultimately by the final consumer. It is not a charge on companies. It is charged as a percentage of prices, which means that the actual tax burden is visible at each stage in the production and distribution chain. It is collected fractionally, via a system of deductions whereby taxable persons can deduct from their VAT liability the amount of tax they have paid to other taxable persons

25

on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.

In other words, it is a multi-stage tax, levied only on value added at each stage in the chain of production of goods and services with the provision of a set-off for the tax paid at earlier stages in the chain. The objective is to avoid 'cascading', which can have a snowballing effect on prices. It is assumed that due to cross-checking in a multi-staged tax, tax evasion will be checked, resulting in higher revenues to the government. Over 130 countries worldwide have introduced VAT over the past three decades and India is amongst the last few to introduce it.

India already has a system of sales tax collection wherein the tax is collected at one point (first/last) from the transactions involving the sale of goods. VAT would, however, be collected in stages (installments) from one stage to another. The mechanism of VAT is such that, for goods that are imported and consumed in a particular state, the first seller pays the first point tax, and the next seller pays tax only on the value-addition done - leading to a total tax burden exactly equal to the last point tax.

TABLE: Tax implication under Value Added Tax Act

Selling Price Seller Buyer (Excluding Tax) Invoice Tax Rate value (Incl Tax) 4% CST 12.5% VAT 12.5% VAT 104 4 0 4.00 Tax Payable Tax Credit Net Tax Outflow

100

114

128.25

14.25

0*

14.25

124

139.50

15.50

14.25

1.25

26

Consumer

134

12.5% VAT

150.75

16.75

15.50 VAT CST

1.25 16.75 4.00

Total to Govt.

8.2.2

MODVAT
Modvat stands for "Modified Value Added Tax". It is a scheme for allowing relief

to final manufacturers on the excise duty borne by their suppliers in respect of goods manufactured by them. E.g. ABC Ltd is a manufacturer and it purchases certain components from PQR Ltd for use in manufacture. POR Ltd would have paid excise duty on components manufactured by it and it would have recovered that excise duty in its sales price from ABC Ltd. Now, ABC Ltd has to pay excise duty on toys manufactured by it as well as bear the excise duty paid by its supplier, PQR Ltd. This amounts to multiple taxation. Modvat is a scheme where ABC Ltd can take credit for excise duty paid by PQR Ltd so that lower excise duty is payable by ABC Ltd.

The scheme was first introduced with effect from 1 March 1986. Under this scheme, a manufacturer can take credit of excise duty paid on raw materials and components used by him in his manufacture. Accordingly, every intermediate manufacturer can take credit for the excise element on raw materials and components used by him in his manufacture. Since it amounts to excise duty only on additions in value by each manufacturer at each stage, it is called value-added-tax (VAT).

The modvat credit can be utilized towards payment of excise duty on the final product. When the scheme was first introduced, it covered only some excisable goods. Gradually, the scope of the modvat scheme has been enlarged from time to time under various notifications. From 16 March 1995, all excisable goods can take the benefit of the scheme except those mentioned below:-

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In case of inputs In case of final products Motor Spirits, Special Boiling Spirits, High Speed Diesel.

8.2.3 CENVAT
Cenvat was introduced in place of Modvat w.e.f. 1.4.2000, vide new set of rules 57AA to 57AK. Later, separate Cenvat Credit Rules were introduced w.e.f. 1-7-2001. These were replaced by Cenvat Credit Rules, 2002. These are now replaced by Cenvat Credit Rules, 2004 w.e.f. 10-9-2004. Service Tax Credit Rules, 2002 were issued effective from 16-8-2002, which are now merged with Cenvat Credit Rules, 2004 w.e.f. 10-9-2004.

Realisation of Excise and Custom Duties From Crude Oil and Petroleum Products
(Rs. In Crore.)
Products 200304 Actuals 1 A) Excise Duties 1. Motor Spirit 1302 5018 8501 11563 12575 13892 17554 18303 2 200405 Actuals 3 2005 06 Actuals 4 200607 Actuals 5 200708 Actuals 6 200809 Actuals 7 200910 Actuals 8 201011 Actuals 9

2. Kerosene Oil

355

249

699

1390

1700

1273

212

236

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3. Refined Diesel Oil

793 6769 11028 10570 13470 14455 21773 24672

4. Diesel Oil (NES)

35 1233 1179 1038 992 1246 505 389

5. Furnace Oil

49 616 779 971 822 996 1756 1877

6. Pol. Products (NOS)

421 2715 2878 3483 2906 3711 4623 4919

7. Petroleum Gases

66 359 1542 2445 2552 2424 319 454

8. Cess on crude oil

2757 3243 2731 4501 5134 5248 5007 7034

Total (A)

5778 20202 29337 35961 40151 43145 51749 58884

B. CUSTOM DUTIES

1. Crude Petroleum

3145 6257 4818 6820 7491 9761 7158 7583

2. Petroleum Products

920 6203 1949 2346 3091 3489 4236 6426

Total (B)

4065

12460

6767

9166

10582

13250

11394

14009

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Grand Total (A+B)

9543 32662 36104 45127 50733 56395 63143 71893

8.3

Key Positives

Exploratory successes:
The country has seen a spate of successful oil and gas discoveries over the past 45 years. This could be attributed to favourable government policies for E&P segment. With success of NELP, the exploration acreage is increasing at a faster clip. However, still 52% of the exploration acreage is not explored or poorly explored, which promises good potential. With commercialization of the said reserves, the demand supply scenario of the natural gas in the country is set to reduce.

Robust demand growth:

Demand for petroleum products is dependent on the level of economic activity of a nation. The per capita consumption of India is one of the lowest in the world. In the past, we have seen a fair degree of correlation between the growth in petroleum products and the growth in the overall economic activities. With economy expected to register a decent growth going forward, the demand for petroleum products is likely to be on the higher side.

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8.4

Key Negatives

Regulatory hindrances: With a view to move towards market-determined prices of petroleum products, APM (administered pricing mechanism) was dismantled in 2002. However, the subsequent steep rise in the crude oil prices had forced government to regulate the prices once again. Thus, profitability was severely dented.

Subsidy burden: Under-recoveries on the sale of sensitive petroleum products continues to hurt companies operating in the segment. Upstream players (ONGC and GAIL) continue to share 33% of the gross under-recoveries. This has constrained the growth in profitability to a large degree.

Lower tariff protection: India has a surplus refining capacity, which is further likely to increase over the next few years. This is due to various brownfield and greenfield projects undertaken both by public sector as well as private sector enterprises. With current favourable demand dynamics, companies are able to reap benefits from export of petroleum products. However, with significant global refining capacities coming up post 2008, refining margins are likely to soften from the current levels.

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CHAPTER 9

INTRODUCTION TO HPCL

VISION:
To be a World Class Energy Company known for caring and delighting the customers with high quality products and innovative services across domestic and international markets with aggressive growth and delivering superior financial performance. The Company will be a model of excellence in meeting social commitment, environment, health and safety norms and in employee welfare and relations.

MISSION:
HPCL, along with its joint ventures, will be a fully integrated company in the hydrocarbons sector of exploration and production, refining and marketing; focusing on enhancement of productivity, quality and profitability; caring for customers and employees; caring for environment protection and cultural heritage. It will also attain scale dimensions by diversifying into other energy related fields and by taking up transnational operations.

9.1 INTRODUCTION TO HPCL MUMBAI REFINERY

HPCLs Mumbai refinery, one of the most complex refineries in the country, is constructed on an area of 321 acres. This versatile refinery which is the first of Indias modern refineries, symbolizes the countrys industrial strength and progress in the oil industry. Mumbai Refinery has grown over the years as the main hub of petroleum products. The refinery has reached to present level through several upgradation and restructuring processes. A chronological summary of the developments is provided below:

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M/s Esso commissioned in 1954 with a crude processing capacity of 1.25 MMTPA.

Lube refinery, Lube India Ltd, was commissioned in 1969 with a capacity of 165 TMTPA of Lube Oil Base Stock (LOBS) production.

Crude processing capacity increased to 3.5 MMTPA during 1969 Government of India took over Esso and Lube India and formed HPCL in 1974.

Expansion of fuels block was carried out by installation of new 2 MMTPA crude units in 1985.

Second expansion of Lube Refinery took place to increase the capacity of the refinery to 335 MMTPA, so far the largest in India.

The current installed capacity of the refinery is 6.5 MMTPA

9.2

PRODUCTS OF HPCL
Total Products = 30 The refinery manufactures many types of products, which are broadly classified into 3 types. Each classification further contains various types of products, which are shown as follows. The Lubes itself has 250 to 300 brands. The products of the company are given as below: Fuels = 13 Lubes = 10 Specialties = 7 Fuel Products 1. Propane 2. LPG 3. Motor Gasoline

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4. Low Aromatic Naphtha 5. High Aromatic Naphtha 6. Special Cut Naphtha 7. Aviation Turbo Fuel 8. Superior Kerosene Oil 9. Special cut Kerosene 10. High Speed Diesel (3 Grades) 11. Light Diesel Oil 12. Fuel Oil (2 grades) 13. LSHS Lube Products 1. Neutral Oils = 3 2. Turbine Oils = 2 3. Industrial Oils = 2 4. Spindle Oil 5. Bright Stock 6. Slack Wax Specialty Products 1. Hexane 2. Solvent 1425 3. MTO 4. CBFS 5. RPO 6. Bitumen (3 Grades) 7. Sulfur

Refined and Other fuels: An Introduction

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1.

Diesel (HSD), largely a transport fuel, forms the biggest chunk (35 per cent) of total

petroleum product consumption in India. Diesel is mainly used in the road transport, rail transport, and agriculture and power generation sectors. Road transport and agriculture account for 73-75 per cent of total diesel consumption. The balance is accounted for by the railways 4-5 per cent, the manufacturing industry (captive power generation) and power utilities 13-14 per cent and other end-users. The transport fuel demand was met with by considerable imports just six years back. However, the scenario has changed and India has recently emerged as net exporter of diesel.

2.

Motor Spirit (MS), Motor Gasoline, Petrol and Gasoline are terms interchangeably

used in India for this light distillate product of refineries. Motor spirit (MS) is used as a fuel in vehicles such as passenger cars, two-wheelers and three-wheelers. MS accounted for 7.43 per cent of the total demand for petroleum products in 2003-04. MS production increased at a CAGR of 14.5 per cent in the period 1998-99 to 2003-04. The consumption has, however, grown with comparatively lower CAGR of 7.53 per cent in the same period.

3.

Naphtha, it is a highly volatile product, manufactured from crude oil by direct

atmospheric distillation and by catalytic cracking of heavy residues. The demand for Naphtha is inextricably linked to that of the petrochemical and fertilizer industries where it is used as a feedstock (raw material). While production of Naphtha has increased from 1998-99 to 2005-06 at a CAGR of 13.24 per cent, overall consumption of Naphtha has increased at a CAGR of 4.95 per cent during the same period.

4. Kerosene, also called Superior Kerosene Oil (SKO), is a middle-level distillate and is primarily used in India for cooking. Kerosene has been classified as a common mans fuel and keeping this in view, the price of SKO through the Public Distribution System is subsidized. The production of Kerosene was lagging behind demand during 1998 to 2002

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and the gap was filled by imports. Since 2007, the production of Kerosene has gone up, reducing Indias dependence on imports.

5.

Liquefied Petroleum Gas (LPG), is largely used as a domestic fuel in India for

cooking and to a lesser extent, as an industrial and commercial energy source. LPG is a cleaner alternative fuel for automobiles compared to petrol, diesel, etc. Production of LPG has increased at a CAGR of 16.08 per cent from 3.64 MMT in 1998-99 to 7.67 MMT in 2005-06.

6.

Aviation Turbine Fuel (ATF), as the name suggests, is used as a fuel for aircraft.

ATF is a middle level distillate along with Kerosene and High-Speed Diesel in the fractional distillation of crude oil. Production of ATF in India has been growing at CAGR of 13.4 per cent from 98-99 to 03-04. The consumption of ATF has been has been growing at a CAGR of 3.4 per cent from 98-99 to 03-04.

7.

LDO, is a distillate fuel with a small proportion of residual fuel. India is one of the

few countries that produce LDO. This fuel is used for agricultural pump sets by small industries and as start up fuel for power generators. LDO consumption is on an average about 4 per cent to 4.5 per cent of the total diesel consumption in India.

8. Low Sulphur Heavy Stock (LSHS) and Heavy Fuel Oil (HFO) are jointly described as Fuel Oils. Fuel Oils are consumed mainly by the fertilizer industry, mechanical and electrical equipment manufacturers and the chemical and textiles industries. Apart from the manufacturing sector, the other big consumer is power. In thermal power plants, Fuel Oil is used as a feedstock for power generation and as a fuel for boilers in the plants. Consumption of LSHS/HFO has declined at CAGR of 0.1 per cent from 1998-99 to 2003-04. However, production of LSHS and HFO has increased at CAGR of 3.9 per cent in the same period.

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9.

Bitumen, is also known as asphalt. The uses of bitumen are numerous. The chief one

is road construction including surfacing airfield runways and taxi tracks. It is also used for hydraulic applications such as canal lining, river bank protection, dam construction and sea defenses. There are also numerous industrial applications like roofing felt manufacture, printing inks, electrical cable / junction boxes, mastic for roofing of terraces, duplex paper manufacture, etc. The consumption of Bitumen has grown at a CAGR of 5.3 per cent from 98-99 to 03-04.

10.

Compressed Natural Gas (CNG) is a relatively clean automobile fuel with lower

emission levels of SOx, NOx and SPM. It is, therefore, being promoted by the Government of India as a fuel for the transport sector by granting fiscal incentives. Average CNG consumption has grown at a CAGR of 76.86 per cent from 201.67 tonnes per day (TPD) as at April 1, 2001 to 1115.66 TPD as at April 1, 2004. Government has permitted use of LPG, being a clean and environmentally friendly fuel, as an automobile fuel. For this purpose, MoPNG along with the other ministries/ Departments concerned has formulated necessary legislative and Regulatory framework necessary for the safe use of LPG as an automotive fuel. Currently, there are 694.65 lakh vehicles running on LPG in India, which does not include vehicles using LPG unauthorisedly.

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9.3 FINANCE DEPARTMENT STRUCTURE

Gm - Finance Mr. Rakesh Kumar.

Chief Manager (Finance)

Mr. G Vasudevan.

Chief Manager (Yield & Excise)

Mr. Sankar Murthy

Budget & Mis

Mr. Sanjay Kumar.

Excise
Mr. Kamal Chakraborthy

CustomsMr. R S Hatage

Payroll
Mr. V A Shinde

General Accounting Mr. Dinesh N Naik

Reimbursement & Disbursement Mr. M D S Shastry

Reimbursement Mr. Lava Kumar. (Deputy Mgr.)

Plant & Warehouse Mrs. Rasika Dhuri

Disbursement Mr. Shivaram K.

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9.4 PROJECT FINANCE DEPARTMENT STRUCTURE

DGM Project Finance Mr. A V Narayana Rao.

Chief Manager Mr. Rakesh Mahajan

Manager Mr. S V Chattre

Deputy Manager Mr. Ashish Kumar

Accounts Officer Mr. Prathamesh Khedekar

Accounts Officer Mr. Sanjeev Sidana

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9.5 FUNCTIONS OF FINANCE DEPARTMENT:

MAJOR FUNCTIONS: Payment for Crude Payment of ocean freight Payment to employees Payment to vendors Excise & Customs activities Project Finance Budgeting Monthly & annual P&L accounts MIS reports Statutory compliance like PF etc Finance concurrence for purchase activities

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CHAPTER 10 INTRODUCTION TO PAYMENTS OF HPCL

PAYMENTS

EMPLOYEE

VENDORS

STATUTORY AUTHORITIES

PROJECTS

EMPLOYEE PAYMENTS:
Employee Payments includes the following aspects: 1. Payroll 2. Reimbursement 3. Loans 4. Awards 5. Medical reimbursements 6. Self Lease

VENDOR PAYMENTS:
Vendor Payments includes the following payments:

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1. Materials Suppliers. 2. Service Providers. 3. Materials and Services 4. Local Payments 5. Advance Payments

PAYMENTS TOWARDS STATUTORY AUTHORITIES

The company HPCL has to make the payments towards the following Statutory Authorities 1. Excise 2. Customs 3. Cenvat / Sales Tax and Service Tax. 4. Crude Oil Payments towards Shipping Authorities. 5. ONGC ( Oil and Natural Gas Corporation) / FOB( Free on Board) 6. Bombay Port Trust (BPT) now called as the Mumbai Port Trust (MPT) 7. BMC i.e. Bruhamumbai Municipal Corporation. 8. TDS, i.e. Tax Deductible at Source

PROJECT FINANCE - PAYMENTS

Various Projects undertaken by the company include the following payments: 1. License Payments such as Royalty Fees etc. 2. Milestone Payments. 3. Regular Payments. 4. Fixed Assets Capitalization.

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CHAPTER 11 EMPLOYEE PAYMENTS

11.1 EMPLOYEE PAYROLL:

All the regular payments for the permanent basis are done on monthly basis. The payment of salaries is carried out by the payroll section of the finance department.

Every employee is allotted a unique employee payroll number which is provided to him at the time of joining of the company, and it is active until the entire working life or retirement of the particular employees.

A computerized system is used to record all the data pertaining to the employee. The information pertaining to the employee is stored in the system through a document called as the Payroll Change Advice. It takes into account both, permanent as well as temporary information about the employees.

Once the data is recorded in the system, it is also transferred to a database called as the Employee Muster. The Employee Muster acts as a Control Database for the overall organization Hindustan Petroleum Corporation Limited (HPCL).

In all, there are about Seven Pay offices at the Head Quarter Offices, 4 Zones and 2 Refineries, which constitute the overall Employee Payments. The payment is made through the refinery through the ECS method i.e. the Electronic Clearing Service System.

The employee muster i.e. the payroll slip also contains information about other earnings except basic pay such as Dearness Pay, Dearness Allowance, Overtime

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Allowance, Overtime Allowance, Shift Allowance, Duty Allowance, Meal Allowance, Transportation Allowance, News/ Magazines Allowance, recorded in system for each employee number.

The Payroll slip also contains provision for Stagnation increment, Variable Dearness Allowance, City Compensation Allowance i.e. Rs.300 per month, Education allowance i.e. Rs 250 per month per child, Washing reimbursement, Call Back Allowance.

Applicable deductions such as provident fund, income tax, medical insurance, LIC Payroll, Canteen Charges, and Accident Insurance etc are also recorded in the employee muster. The perquisites are calculated through the computerized system and not annually.

PROCESS OF PAYMENT:
Before paying the salary to the employee, all the detailed information like Basic Salary, deductions, overtime etc are collected from the respective departments and then recorded into the computerized system as mentioned above. It also includes permanent data like promotions, housing status etc.

Once all the data is collected, the inputs i.e. also called as the Pre- Payroll are sent to the HR Department. Once an approval is granted from HR Dept. the data is sent to the ERP (Enterprise Resource Planning) Dept. The ERP dept check the data, approves it and sends it to the HR dept, which again comes back to Finance Dept. All the necessary changes are made in the Pre- payroll process and then the inputs are closed for the processing. The payroll program is carried out around 20th of every month.

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The pay roll slip includes the Gross Salary, the deductions and the net payable amount. Earnings and deductions are the two components of the salary; the final salary payable depends upon these two factors.

Along with the pay slips, certain other reports are also generated for payment to other parties or agencies such as provident fund, superannuation fund, income tax, credit society etc so that the deductions on these accounts are deposited with the respective authorities. Other deductions such as housing loan, vehicle loan, advances etc are listed to make necessary accounting entries.

OTHER PAYMENTS:
The payment is carried out in batches. The payroll section also deals with some other payments such as: 1. General Vouchers: it includes the personal payments of the employees 2. Statutory payments to Income Tax, Professional Tax, LIC, Society etc. 3. Leave Encashment: 25% of the leave of the employees is not encashable. Rest of the leaves balance is encashable. 4. Gratuity Calculation of the employee. 5. Provident Fund.

11.2. REIMBURSEMENT:
Reimbursement means payment of cash towards the employees, for the expenses made by them, but is paid by the company. Reimbursement is generally given in cash. The expenses are made by the employee and later on, the bill or invoice is given to the company. The company analyses the bill or invoice and then pays the cash to the employee.

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There are following types of reimbursement: 1. Tour and Travel Reimbursement: The employee will have to fill a TOUR ITINERARY FORM getting the authentication from his respective boss to go on an official tour for particular no. of days as per the program he/ she will be attending for. The tour may be Domestic Tour or Foreign Trade.

This Reimbursement can be of two types: (a) (b) The employee can spend his own money The employee can take an advance amount from the company by filling the Advance TES (Travel Expenses Statement) and getting it approved from their respective boss for availing the advance for his tour.

After the tour, the employee gets his Ticket, Hotel Stay Bills etc and accordingly as per his grade, the organization pays them Bhatta. Finally, after checking by the reimbursement section of the Finance Department the payment is made to the respective employees.

The reimbursement section takes care of all the employees: (a) (b) Non- management Management as per the entitlements.

2. Vehicle Reimbursement: All the expense made by the employee towards his vehicle, such as repairs, maintenance etc is reimbursed. A control sheet is prepared and approved by the HR Department. This is also called as the ARFC (Authorization and Record of Fixed Assets). An ARFC document is prepared for each employee for the particular year. It indicates the

46

amount of cash payable to the employee according to his position in the organization and his pay structure. Vehicle reimbursement is generally given in cash.

3. Telephone Bill / Cell phone bill Reimbursement It refers to the payment of cash for the use of telephone as well as the mobile phone used by the employee of the organization. This facility is not given to every employee. It is given to specific employees depending upon his/ her grade as well as the work structure of the employee. It is given against specific policies and approval and is given in cash. This type of reimbursement is given for employees official use as well as his personal use.

Reimbursement for use of mobile phones is done in cases of people of higher grades such as DGM, GM etc through the ECS system (Electronic Clearing System). Reimbursement is also made in case of employees residential telephone. However, it is not same for employees. It depends upon their grades. The limits are decided by the HR department and then they are approved and applied by the finance department. The limit for an A Grade employee is Rs.500 per month. For employees below D Grade it is Rs. 950 per month. For E and F grades, it is Rs. 1200 and Rs. 1350 respectively. The maximum grade is G grade and the monetary limits for it are Rs 1650 per month.

In case if the bills are not paid through the ECS, the employees have to submit the Original or the Xerox copy of the bill to the reimbursement section and then the payments are made from here.

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4. Care Mileage Reimbursement: The company provides a certain amount of cash for the car mileage. This car mileage is not given to the al employees. It depends upon the grade of the employee within the organization. For example, for a Deputy Manager, it is Rs. 2500 approximately.

5. Out of Pocket Expenses: In this type of reimbursement, the employee is paid in the cases of his working on a holiday, working for after shift hours etc. This type of expenses is provided to Management employees only. It is provided on hourly basis. For five hours, it is Rs. 675 and is not taxable at all. For the non-management employees it is called as overtime.

6. Local Reimbursement: Local reimbursement is done in case of sundry or petty cash expenses etc. it generally includes stationery items or small spare parts of machines, which are needed urgently in case of emergencies. It is given in case of small expenses such as gaskets, repairs, local conveyance etc. It is not given to outsider persons. The payment voucher is approved by a manager and given through a cashier but for obtaining the cash an invoice needs to be given to the cashier. All the transactions are then recorded in the Petty Cash account.

7. Statutory Payments: This section also looks after the matter of payments of all the statutory payments such as: (a) Electricity Bill of the company Lube Refinery and the Fuel Refinery. It includes the electricity bill of the residential quarters of HP Nagar East and HP Nagar West also.

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The electricity is taken from Reliance Energy Limited and Tata Power Company. The payments are made for monthly basis. Majority of the payments are of Tata Power, which comes to Rs. 5 crores- Rs. 7 crores on an average on monthly basis. The payments towards Reliance energy Limited comes to around Rs. 9 10 lakhs on an average on monthly basis.

Extra electricity, i.e. other than for the company is also needed for power generation on large scale for some specific plants. This electricity is taken from the Tata Company. The payments are made on monthly basis. There are 2 due dates. If the payments are made on 1st due date, the company gets a discount.

(b) Water Bill of all the residential Quarters: HPCL Nagar East and HPCL Nagar West. (c)Club of HP Nagar East- reimbursement of club expenses. (d) Signature of the Company Cheques as per the limits decided by the company.

11.3. CASH DEPARTMENT

The reimbursement cell also looks after the CASH DEPARTMENT. It is also called as the CASH OFFICE. This department handles both, the employees of Management as well as non- management The payments here are as stated below: (1) (2) Out of Pocket Expenses. TES (Travel Expenses Statement) if the amount is less than Rs.10, 000. If the amount is more than that,, the employees are paid by cheques. (3) TES Advance Payments.

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2. Prepare CASH RECEIPT concerning TENDER MONEY DEPOT. i.e. EMD (Earnest Money Deposit) (1) (2) Encashment of employees personal cheques. Any other petty expenses that arises in day-to-day working of the organization.

One of the most important functions rather payment made by the Cash Department / Cash Office is: As and when the Imprest Fund of Rs. 5, 00,000 in the cash office is over, the reimbursement section reimburses the same to the cashier producing the paid vouchers and after duly checking each document to see if there is proper approval and then the amount is paid. The objective of the Cash Office is to meet the day-to-day needs of the employees and to make the employees avail of cash by submitting the required documents concerning them. The idea of opening the Cash Office is to ease the employees who work during the night shifts and general shifts so that they can get money without any problem and that too without going to any bank. The employees can withdraw cash from their personal cheques and have smooth function off cash for their needs. The personal cheques are later deposited in the company account to get the proceeds of the cheques. The entire function of the accounting system is programmed by the ERP Data Centre of the Petroleum House. J.D.EDWARDS World Explorer software is used to carry out all the functions on the online system.

11.4. AWARDS
Awards are generally decided and handled by the respective department in the organization and then a list of employees suitable for awards is sent to the finance department. Cheques are then prepared by the finance department and given to the respective employees.

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CHAPTER 12 VENDOR PAYMENTS

The term vendors payment is a very important aspect in the organization. Vendors payment means making payment to the outsiders i.e. payment to the contractors, suppliers of materials and services. A purchasing authority is set up for carrying out the functions smoothly and for proper and timely payment of all receipts within the organization. The vendor payments are looked after by the DISBURSEMENT SECTION of the Finance Department.

Purchasing committee:
Functions of the purchasing committee: Select potential vendors. Maintain and update the approved vendors list. Keep abreast of the market trends. Ensure proper inventory control. Maintain contact with government policies and notifications. Arrange for import materials and equipment. Vendor payment is generally made in cases of the following documents produced: 1. Purchase Order. 2. Invoice from the vendors 3. Material Received Report (MRR)

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1. PURCHASE ORDER:
Following are the contents of the purchase order: (a) Name of the vendor. (b) Description of goods and services. (c) Quantity of each item. (d) Rate of each item (e) Other charges payable includes Duty Sales tax Octroi Insurance Duration Payment mode

Statutory Liabilities:
Service Contracts:

(a) Liability for TDS of Income Tax (b) ESI/ PF Retain amount (c) Retention Money Goods Retention money @ 10% of the value of supplies or contract is kept as a guarantee for performance of the goods or the plant erected. This money is returned back

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after the defect liability period, which is normally 18 months. In some cases, a bank guarantee for the amount is taken and the money is returned. The bank guarantee is returned after the defect liability period. If there is a bad performance, then the money is recovered from the retention money or from the bank guarantee.

2. RECEIPT OF MATERIALS / SERVICES

When the materials are received or jobs completed, ensure that the quality, quantity and other specification are met by the supplier / contractor. Report variation in quality, quantity specifications, delivery schedule, etc. the concerned purchasing authority for appropriate action against the supplier. Enter the quantities of each item received on the materials received report (authority to pay) copy of the purchase order in the appropriate columns against total received. Sign the materials received report against the caption above noted quantities received. The officer while signing the MRR will append his name and designation also. Route material received report to disbursement section / paying authority.

Partial Derivatives:
As a general policy, partial derivatives shall not be permitted. If due to special circumstances, partial derivatives are permitted.

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3. INVOICE FROM VENDORS:

Invoices or bills are issued by vendors for providing materials or services. These bills depend based on purchase order and material received report. The quantity or rate of the product must be match with each other. If there is difference in amount of quantity or quality of the goods, zero payment will be given in that case. The vendors charge only that product rate or quality, which had given in purchase order and material, received report. After doing all the deduction and rectification, the bills from the vendor should match with the purchase order and material received report. The vendors prepare 3 copy of invoices- one original for the buyer, the second for Transporters copy and one for himself.

Role Of Finance Department:

The finance department plays a very important role in the above activity. For the vendor payment, it is necessary to follow purchase order and MRR rules and regulation that means the bills from vendors should match with the purchase order and MRR. The finance department matches all the things with the bills from vendors and then makes the payment to vendors show different quality or quantity of product as compared with purchase order or material received report then no payment will given for the vendors.

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Accounting Aspects:
As soon as the MRR is made, the system debits the respective expense or the capital account and creates an accounts payable credit in favor of the vendor. When the payment is made, the accounts payable is debited and the payment is debited to the bank account.

Mode Of Payment Of Bills:

(1) Letter of credit:

Letter of credit is issued by the receiving company to the vendors. This type of payment plays an important role in abroad payment. The type of the Letter of credit is mostly irrevocable. (2) Document through Bank: This document is also called as Cash Against Document (CAD). Against the bank advice along with one set of documentary evidences, applicability of LD (Liquidity damages), and compliance with the Purchase order terms has to be checked. In case of any discrepancies- party should be informed send request should go from party to HPCL banker to accept the changed amount because of discrepancies. After the retirement of documents details of the document should be entered in the DTB register and LR to be handed over to the project warehouse for further clearance.

(3) Cheques:

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Some payments are made in the form of cheques. The receiving company makes payment to the supplier in the form of cheque. Cheques are issued in favor of vendor. (4) e- payment: All the payments are made through internet If the vendor has an account with the same bank as the payment banker, the credit will go the accounts immediately. Otherwise, a cheque is generated by e- payment banker and sent by courier to the vendor. The finance department also files the statutory returns of TDS etc for the month by the due dates and sends the TDS certificates to the vendors so that they can claim credit while filing their returns.

Vendor Payments is made in cases of following:

1. Materials. 2. Services. 3. Goods as well as services.

Materials:
In case of materials, payments are generally done in Cheques and the amount is subject to excise duty. These payments are also subject to the Cenvat deductions. However, for this purpose the Cenvat documents needs to be produced. VAT claims are

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reimbursed from the West Zone Office on monthly basis and credit is availed. No TDS (Tax Deductible at Source) is liable. Generally, the company HPCL keeps 10% of the total amount as Retention Money, which is also called as Performance Bank Guarantee. Provisions are made for the necessary adjustments such as Liquidity Damages in the cases of late delivery beyond the validity period. The materials are subject to the Octroi, Freight, Sales Tax, VAT etc. The materials are also subject to 1% SD (Security Deposit). All the above details for the particular vendor are maintained in a document named Payment Control Sheet which facilitates the cash department to prepare the cheques and the payment is done.

Services:
In case of Services, a document named as Payment Control Sheet for Service Orders is prepared. The services are not liable to Excise Duty, Octroi and Sales Tax. In case of services, Service Tax and Work Contractors Tax need to be paid. Tax Deductions at Source i.e. TDS is liable. There are three types of TDS: (a) (b) Contractors Services Professional Services

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(c)

Rent.

However, for availing it TDS documents needs to be produced. Service payments also include (a)Mobilization Advance, (b) Employee Provident Fund, Employee State Insurance etc is provided to the laborers@ 35 % as a social security. This amount is approved by the HR Department and then the payment is made if the labor is eligible for such payments. (c)Liquidity Damages (LD) in case of late delivery terms, i.e. delivery after the validity period of the contract between the two parties. (d) Security Deposit at 1% (e) Performance Bank Guarantee or Retention Money at 10%

Materials And Services:

In cases where the supplier provides goods as well as services, the agreement is subject to composite tax. It is subject to partial TDS. Provident Fund and Employee Insurance are also ensured. The transactions also include Performance Bank Guarantee (PBG) as well as Retention Money. It is also liable for Cenvat, Sales Tax and all the necessary adjustments.

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PAYMENT CONTROL SHEET A common Payment Control Sheet is prepared for each vendor, which contains all the details of all the transactions with the amount, the LD, Income Tax, PBG @ 10%, PF and the amount paid. All the transactions of the company are stored in the software J.D.E. If the records are needed urgently, this document acts as a blueprint, which helps to give information quickly. It also facilitates the section to take decisions regarding the financial limits of the payments.

Here in case of Vendor Payments, it is to be noted that the payments are made only on the due dates decided depending on the number and type of transactions. The payments are made within 30 days if they are not the type of Advance Payments or Dispatch Documents against the banks.

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CHAPTER 13 STATUTORY AUTHORITY PAYMENTS

13.1 EXCISE:
Excise duty is a levy of payment on the production function of the organization. It is an indirect tax levied on goods manufactured in India. The tax is administered by the central government under the authority of entry 84 of the union list (list 1) under the seventh schedule read with the article 246 of the constitution of India. The central duty is levied in terms of the Central Excise Act 1944 and the rates of duty are prescribed under the schedule of the Central Excise Act 1985.

Excise duty is paid at the time of the clearance of the goods of the company to their respective destination. Sometimes, companies also need goods for their own consumption. However, because excise duty is a levy on the production function, even the own consumption and loss beyond a controllable limit is excisable.

The assessee i.e. the company HPCL itself assesses the duty payable on the excisable goods.

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MANNER OF PAYMENT:
1. The payment of the duty on the monthly basis must be done by 5th of the succeeding month except for the month of March when the duty is to be paid by the 31st march

2. The duty liability shall be deemed to have been discharged only if the cheque received by the nominated bank is honored. The excise duty is calculated on the following: - Dispatch quantity of each product. (a) (b) Total Value of the dispatches. Duty rates they are of two types: Ad- valorem duty rate Specific duty rate.

1) Dispatch quantity of each product: Since the duty rates and values differ for each product, dispatch quantities are to be ascertained for each product differently.

2) Value of the dispatches: Value of the dispatches of each product is calculated based on the price charged to each dispatch. Where a customer is eligible for a duty exemption or a

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concessional duty, then the value of such dispatches are calculated separately for applying the duty rates on them separately.

3) Duty Rates: The company HPCL applies Excise Duty Rates based on the: Ad- valorem duty rate for some of the goods such as Petrol (Motor Spirit), HSD (High Speed Diesel), LSD (Low Diesel Oil) etc and; A specific duty for some of the goods such as SKO (Superior Kerosene Oil), LPG (Liquefied Petroleum Gas) etc.

Ad Valorem Duty Rate: This duty is expressed as a percentage of value of goods, which is now the increasing trend. Assessable value of goods has to be found out before the amount of duty leviable thereon is determined and paid. In this type, his responsibility is to determine assessable value of goods; assessable value can be one of the following three.

13.3 CRUDE OIL PAYMENTS

It is the most important type of payment in the company. It is the most important product that is imported by the company HPCL. It accounts for almost 95% of the payments and cost. Mumbai Refinery of HPCL is processing mainly two types of crudes:

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PG Crude (Persian Gulf, Saudi Arabia). It is also called as the Arab Mix from Persian Gulf.

BH Crude (Bombay High). ONGC (Oil & Natural Gas Corporation)

Crude:
Performance Indicators For the year 2005- 2006: CRUDE PG BH MOU Rating GRM $/Bbl 6248.7 TMT 4307 TMT 1937.9 TMT Excellent 2.51

Energy Cons. MBTU/Bbls/NRGF 94.7

TERMS / CONDITIONS TO BE UNDERSTOOD BEFORE PAYMENTS: 1) Quantity:

Quantity is decided according to the crude slate. Provisional quantity is provided by Shipping Corporation of India in monthly crude slate. The final quantity is as per OCM (Oil Commit Message).

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2) Grading:
It is undertaken by the Shipping Corporation of India (SCI) from IOC through HPCL. They advise full particulars like: Load port B/L date Disport Grade of crude Supplier B/L holder B/L quantity

3) Price:
Price is advised by the IOC i.e. Indian Oil Company. There is a credit for one month i.e. 30 days of imported crude. The difference between the B/L quantity and receipt quantity by refinery is the loss if it is paid earlier. All the payments are made after receiving the crude in the refinery.

Data For Payment Is Given By:

IOC (Indian Oil Company) SCI (Shipping Corporation of India) OICL (Oriental Insurance Corporation Limited).

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PROCESS OF CRUDE PAYMENT:

The Head Quarters or the Petroleum House decided upon the quantity to be ordered in advance for one month. After that, IGM- Interest General Manifesto is prepared. Discharge permission needs be to taken from the Oil Companies.

A bond known as Into Bond of Entry needs to be submitted along with the rates of FOB, provisional rates of freight, insurance etc. Calculation of all the duties is also done. This is done before the goods are received.

One more bond i.e. EX- Bond Bill of Entry is submitted to the Custom Authorities, which contains the details of all the duties to be paid to them. The company pays the custom duty while filing this claim. After paying the duty, the company obtains Out of Charge certificate and on receiving it the company can bring the crude to company and start using it.

When once the goods are received, the dispatch quantity i.e. the bill of lading quantity is matched with the Received quantity. Here the net quantity is found out, billing is done on the Net quantity received, and not the B/L quantity as the quantity reduces due to ocean loss and impurities.

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CHAPTER 14 PROJECT FINANCE DEPARTMENT

Various projects are undertaken by the HPCL to increase its production capacity as well as run the operations on a large scale. The projects are mainly to set up a new plant or to add to the existing capacity etc. These projects require a huge amount of money for purchasing equipments, work force, resources etc and so a separate division of finance is created i.e. Project Finance. The project finance department of HPCL looks after the financing of all such projects. This department not only looks after the payment of vendors but it also looks after the post payment compliances. Here it is to be noticed that all the cash flow is taken care by the Head Quarters.

The major portion of the payments includes payments for:

1. Payments for equipments, raw materials, resources etc. 2. Payment to the laborers - both temporary as well as permanent. 3. Payment for construction of power, water and other facilities. 4. Payment for royalty, firm prices, taxes, duties, octroi, levies, excises duty etc. 5. Payment of excise duty on site fabrication, mobilization advance etc. 6. Payment for workers as salary. 7. Payment for Labor license. 8. Payments to agencies against Payment of final bills. 9. Insurance payments 10. Payments as release of retention money and security deposit. 11. Payments for Value added tax, CST, Service tax payments etc.

14.1

Milestone payments:
It includes the major projects, which are generally undertaken for a longer period.

The cost of completing these projects is also very high, generally in crores of rupees, and
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hence called as milestone payments. These projects are the very important from the point of view of companys growth as well as financial position. For example: GFEC Project i.e. the Green Fuel and Emission Control Project.

14.2

License payments:
It includes payments for taking license or permission for completion of certain

activities such as: (a) License for using technology. (b) License for using the cash. (c) Tax implications. (d) Determining the Mode of payment. (e) Bifurcations of projects / prices based on quantity or time base. etc.

14.3

Regular payments.
This payment includes the payment of vendor bills and invoices, Performance

Bank Guarantee, security deposit, payment of excise duty, Central Sales Tax, Value added tax, Service tax, mobilization advance, retention money, issue of C forms etc.

The payments include mostly the foreign payments, which are done by Letter of Credit or Documents against banks, the procedure for foreign payment sis same as discussed in the payments under the plant and warehouse section of the finance department. I.e. the payments are done only when goods are received and MRR is prepared. The company advises the bank to release the payments when the documents for the import reach the bank.

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14.4

Fixed assets capitalization.

It is an important function carried out by the Project finance department. Initially,

capital budgeting is carried out for Plan projects as well as non-plan projects. The capital budgeting for plan projects is done by the top-level management and other by the respective employees on yearly basis. Appropriation is required for the non-plan projects. A code is given to each asst, which is also called as the AFE No., or the Job no. the project is approved, then the materials come in and then payment is done. All the projects are recorded in CWIP Capital Work in Progress in the J.D.E software and object wise the cost is recorded.

After paying for the assets, the next step is its capitalization. The main document needed here is the AMCA Asset master capitalization advice. After receiving AMCA, we have to create assets in the J.D.E software then pass the journal entries along with the relevant cost and then work with the assets.

The next step is to look after depreciation. The method adopted by the company is Straight Line method. It includes 227 working days at the rate of 5.280%.The rate for general machines is 4.75%, plant and machinery is 5.28%, tanks is 10.34%, vehicles is 9.5, roads and culverts is 6.3% and lastly building depreciation is 3.34%. The depreciation method is different for child and parent assets.

A report named as Plant Transaction / Termission is to be prepared for plant if it is to be removed or its over. It is prepared by the user department and sent to the project finance department and the asset is deleted.

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CHAPTER 15 FINANCIAL ANALYSIS OF STATUTORY PAYMENTS OF HPCL OVERVIEW

1. TOTAL TURNOVER :
Particulars Total Turnover Analysis: The Total turnover of the Company in 2010-11 was Rs. 91,448.03 crores as against the Total turnover of the Company in 2009- 10 that was Rs. 74,044.11 crores. i.e. Increase in the turnover of Rs. 17,403.92 crores. Therefore, this indicates that there is a growth of 23.50% in the Total Turnover of the company which shows a good sign of prosperity. March 2010-11 91, 448.03 (Rs. / Crores) March 2009- 10 74044.11

2. PROFIT AFTER TAX:

Particulars Profit After Tax (PAT) Analysis: The Profit after tax was Rs.1, 571.17 crores in 2010- 11 as against Rs.405.63 crores in 2009-10. It shows a significant growth in the Profits after tax of the company March 2010- 11 1571.17 (Rs. / Crores) March 2009- 10 405.63

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i.e. Rs. 15,311.54 crores. The growth rate is 287.34% which shows a good sign of prosperity.

3. NET SALES
Particulars Net Sales Analysis: The Net Sales of the company in the year 2010- 11 was Rs. 96, 918.15 crores as against Rs. 74, 044.11 crores in the year 2009- 10. This indicates an increase in net sales upto Rs. 22,874.04 crores and an increase in growth rate of 26% in the sales of the products of the company. It shows a good sign of prosperity and good performance of the company. March 2010- 11 96918.15 (Rs. / Crores) March 2009- 10 74044.11

4. TOTAL EXPENDITURE / STATUTORY PAYMENTS:

(Rs. / Crores) March 2009- 10 72379.35

Particulars Net Sales Analysis:

March 2010- 11 88008.21

The total Expenditure or Statutory Payments of the company shoot up to Rs. 88008.21 crores in 2010- 11 from Rs. 723779.35 crores in 2009- 10. the increase in the payments is 21.59%. The main reason for such an increase is the company had extended contracts with the existing companies and tie-ups with new companies, new projects coming in, expanded business, increased demand for products, increased turnover, increased sales etc.

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CHAPTER 16 FUTURE OF INDIAN PETROLEUM INDUSTRY

The future of Indian petroleum industry has good potential but it needs developmental activities in this sector to strengthen itself.

The world at present is experiencing a lot of changes of mammoth proportions. The Petroleum Industry in India is one of the harbingers of huge economic growth. The arena for business has now gone global since trade boundaries are fast dissolving. These developments present. India with tremendous opportunities in the future to be one of the major players in the export of petrochemical intermediaries.

Today, India imports more than 70% of its oil requirements. The search for more oil led India to sift through the international markets comprising of the emerging energytrading countries - China, Russia, and Iran. India has made new partnerships with Venezuela, Burma, Middle East nations, and Pakistan.

The long-term energy strategies of India have to emphasize on the methods of using energy effectively and efficiently, and to enhance energy self-sufficiency. To lift the Indian economy to enhanced economic standards innovation, diplomacy, creativity, and vision are the need of the hour.

India has to compete for conventional energy sources and for that there must be developmental activities for energy efficient buildings and vehicles. The main problems with the Petroleum Industry in India are related to infrastructural developments. The lack of proper storage facilities, enhancements in refining capacities, and fluctuating import prices plays important role in the development of the sector. The target of improvement for the growth of the economy for India should be in the area of the petrochemical sector.

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The need for intermediary products for the manufacturing of the end use products is an important sector to tap in. With the per capita consumption for the petrochemical products in India being low and the production of these products being high, India may become one of the leading exporters of such intermediary products.

The future of Indian petroleum industry depends on:

Demand for petroleum is growing in leaps and bounds. Shifting focus to more production of olefin - ethylene, propylene, butadiene, Price and availability of crude oil and gas as feedstock would still be critical factors.

The demand of the end products would affect the demand of the intermediary products.

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CHAPTER 17 CONCLUSION

Finance is the backbone of any organization. Money is the lifeblood of it. The money needs to be utilized very properly for smooth functioning of the company. The company needs to spend its money or make payments in a way to make optimum utilization of resources. I have observed that it is done so in HPCL.

Thus, we have seen how the payments are carried out by the Mumbai Refinery of HPCL. These Payments form an integral part of the functions of the Finance Department.

The taxation policies of the company are also effective and efficient. The taxation policies of both, the Government as well as the company are very important to carry out the functions of the organization.

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CHAPTER 18 SUGGESTIONS AND RECOMMENDATIONS

1. The company should try to minimize the expenses on repairs and maintenance. Instead on repairing the assets the company can sell it off and purchase new ones.

2. The company should try to minimize the expenses on traveling and conveyance, printing and stationery, electricity and water charges etc.

3. The company can spend some more amount on insurance of the assets of the company so that they can be secured as there are chances of accidents and other thefts.

4. Pricing and taxation of petroleum products should be rationalized to transmit the right price signals so as to minimize if not eliminate distortions and inefficiencies that result in misallocation of resources.

5. Prices of petroleum products should, as far as possible, be aligned with international prices.

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6. Across the board subsidies result in inefficiencies and place an undue burden on an already strained fiscal situation. Subsidies should be minimal, targeted and restrained by a monetary ceiling.

7. Custom tariffs on crude and products should be rationalized so as to moderate the effective rate of protection to a level that will offset the disadvantages suffered by the domestic producers without at the same time allowing them any undue cushion.

8. Excise tariffs should be restructured to protect the consumers from excessive volatility in oil prices.

9. An appropriate pricing regime which promotes efficiency needs to be evolved in relation to petrol and diesel on the one hand and domestic LPG and PDS kerosene on the other. However, it is the latter which is arguably more intractable because of the heavily subsidized prices to consumers.

8. GST could change the competitive landscape in India. So, there should be a timeline for the GST laid down.

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CHAPTER 19 BIBLIOGRAPHY AND WEBLIOGRAPHY

1. Books:
The Petroleum Industry: By Charles F. Conaway

2.

Newspapers:
The Economic Times The Financial Express The Hindu Business Line

3.

Journals:
Petroleum Federation of India The Associated Chambers of commerce and industry in India.

4.

Internet : www.indiantaxsolutions.com www.assocham.org www.infralineenergy.com www.moneycontrol.com www.equitymaster.com www.livemint.com www.hindustanpetroleum.com www.indiabudget.nic

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