200 mrks project

8/3/2019 200 Mrks Project

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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 MUMBAI400706


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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


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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 theteaching 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


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C E R T I F I C A T E

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 BMS CO-ORDINATOR PRINCIPAL

Mrs.Neela Radhakrishnan Mrs.Smitha Ramakrishnan Rita Basu


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TABLE OF CONTENTS

Chapter No TitlePageNo

A List of Abbreviations 7

1 Executive Summary 9

2 Objective of the Study 10

3 Research Methodology 11

4 Review of Literature 12

5 Introduction to Petroleum Sector 16

6 Overview of Petroleum Sector 18

7 Performance of Petroleum Sector 21

8 Tax implications in Petroleum Sector 23

8.1 Introduction to Tax Payments

8.2 Various Tax Payments

8.3 Key Positives and Key Negatives

9 Introduction to HPCL and its Business 32

9.1 Introduction to Mumbai Refinery

9.2 Different Products of HPCL

9.3 Finance Department Structure

9.4 Project Finance Department Structure

9.5 Functions of Finance Department

10 Introduction to Payments 41

11 Employee Payments 43

11.1 Employee Payroll

11.2 Reimbursement


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11.3 Cash Department

11.4 Awards

12 Vendor Payments 51

13 Payments towards Statutory Authorities 60

13.1 Excise Duty

13.2 Cenvat

13.3 Crude Oil Payments

14 Project Finance Payments 66

1 14.1 Milestone Payments

14.2 License Payments

14.3 Regular Payments

14.4 Fixed Assets Capitalization

15 Financial Analysis of the various Payments 69

16 Future of the Petroleum Industry 71

17 Conclusion 73

18 Suggestions and Recommendations 74

19 Bibliography and Webliography 76


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LIST OF ABBREVIATIONS

Companies:

HPCL - Hindustan Petroleum Corporation Limited

BPCL - Bharat Petroleum Corporation Limited

IOCL - Indian Oil Corporation Limited

MRPL- Mangalore Refineries Petroleum Limited

ONGCOil and Natural Gas Corporation

RILReliance India Limited

SCIShipping Corporation of India

PSUPublic Sector Undertaking

Others:

MNES -Ministry of Non conventional Energy Sources

MoPNGMinistry 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&FCarriage and Forward


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B/LBill of Lading

CAGR - Compound Annual Growth Rate

E&P - Exploration and Production

LNG -Liquefied Natural Gas

VATValue 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


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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 ValueChain 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.


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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 theIndian 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: UtpalBhaskarSource: The Hindu Business LineSummary:

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


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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 products-

petrol, 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: J. Prasad and C. G. K. Nair.

Publisher: Tata McGraw-Hill Publishing Company Limited,

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 oil-

glutton, 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


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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 therationale 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 petroleumproducts, 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 PolicyResolution, 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.


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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


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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


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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 besufficient 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


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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.


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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 EXCISEExcise 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


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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


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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

Seller Buyer

Selling Price

(Excluding

Tax)

Tax

Rate

Invoice

value

(Incl

Tax)

Tax

Payable

Tax

Credit

Net Tax

Outflow

A B 100

4%

CST 104 4 0 4.00

B C 11412.5%

VAT128.25 14.25 0* 14.25

C D 12412.5%

VAT139.50 15.50 14.25 1.25


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D Consumer 13412.5%

VAT150.75 16.75 15.50 1.25

Total to Govt.VAT

CST

16.75

4.00

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.)

Products2003-

04

2004-

05

2005 -

06

2006-

07

2007-

08

2008-

09

2009-

10

2010-

11

Actuals Actuals Actuals Actuals Actuals Actuals Actuals Actuals

1 2 3 4 5 6 7 8 9

A) Excise

Duties

1. Motor Spirit 1302 5018 8501 11563 1257513892 17554 18303

2. Kerosene Oil 355 249 699 1390 1700 1273 212 236


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3. Refined

Diesel Oil793

6769 11028 10570 13470 14455 21773 24672

4. Diesel Oil

(NES)35

1233 1179 1038 992 1246 505 389

5. Furnace Oil 49616 779 971 822 996 1756 1877

6. Pol. Products

(NOS)

421

2715 2878 3483 2906 3711 4623 4919

7. Petroleum

Gases66

359 1542 2445 2552 2424 319 454

8. Cess on

crude oil2757

3243 2731 4501 5134 5248 5007 7034

Total (A) 577820202 29337 35961 40151 43145 51749 58884

B. CUSTOM

DUTIES

1. Crude

Petroleum3145

6257 4818 6820 7491 9761 7158 7583

2. Petroleum

Products920

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 4-

5 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 HPCLMUMBAI 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 capacityof 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 interchangeablyused 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 loweremission 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

Chief Manager (Finance)Mr. G Vasudevan.

Chief Manager (Yield &

Excise)Mr. Sankar Murthy

Customs-Mr. R SHatage

ExciseMr. Kamal

Chakraborthy

Budget & MisMr. Sanjay Kumar.

PayrollMr. V A Shinde

General Accounting

Mr. Dinesh N NaikReimbursement &

Disbursement

Mr. M D S Shastry

Reimbursement

Mr. Lava Kumar.(Deputy Mgr.)

Plant & Warehouse

Mrs. Rasika Dhuri

Disbursement

Mr. Shivaram K.

Gm - FinanceMr. Rakesh Kumar.


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9.4 PROJECT FINANCE DEPARTMENT STRUCTURE

DGMProject 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 KhedekarAccounts 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

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:

VENDORS STATUTORYAUTHORITIES

PROJECTSEMPLOYEE

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 likeBasic 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 20 th 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. Restof 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) The employee can spend his own money

(b) The employee can take an advance amount from the company by filling theAdvance 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) Non- management

(b) 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


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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 ashis 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 providedto 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 companyLube 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. 910 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 1

st

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) Out of Pocket Expenses.

(2) 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) Encashment of employees personal cheques.

(2) 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

documentsdetails 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) Contractors Services

(b) 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 5

th

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.

- Total Value of the dispatches.

- Duty ratesthey are of two types:

(a) Ad- valorem duty rate

(b) 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.

AdValorem 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 6248.7 TMT

PG 4307 TMT

BH 1937.9 TMT

MOU Rating Excellent

GRM $/Bbl 2.51

Energy Cons. MBTU/Bbls/NRGF94.7

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.

Abond 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 :(Rs. / Crores)

Particulars March 2010-11 March 2009- 10

Total Turnover 91, 448.03 74044.11

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 ofRs. 17,403.92 crores. Therefore, this indicates

that there is a growth of23.50% in the Total Turnover of the company which shows a

good sign of prosperity.

2. PROFIT AFTER TAX:(Rs. / Crores)

Particulars March 2010- 11 March 2009- 10

Profit After Tax (PAT) 1571.17 405.63

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


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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(Rs. / Crores)

Particulars March 2010- 11 March 2009- 10

Net Sales 96918.15 74044.11

Analysis:

The Net Sales of the company in the year 2010- 11 was Rs. 96, 918.15 crores as

against Rs. 74