Indian taxes a roadblock in biofuel drive

NEW DELHI (Reuters) - India's policy of blending ethanol with petrol to cut its dependence on costly imported crude oil and support ailing sugar mills is being hobbled by a web of taxes, a leading biofuel producer said on Monday.

Indian oil retailers are currently required to mix ethanol with petrol to 5 percent of volume almost nationwide, and the country plans to double that to 10 percent from October 2008, when the new sugarcane crushing season begins.

Petroleum companies have agreed to buy ethanol, an alternative fuel made from sugarcane or corn, at 21.50 rupees (55 US cents) a liter from sugar mills.

"The law says petroleum companies must buy and blend 5 percent ethanol in petrol but the ground reality is that it is not happening," Sanjay Tapriya, finance director of Simbhaoli Sugar Mills Ltd (SIMB.BO), told Reuters in an interview.

"State regulations restrict transfer of ethanol from one state to another due to different taxes imposed by different states. Only 4 percent of ethanol capacity in the country is being used," he said.

The marketing director of leading retailer Indian Oil Corp (IOC.BO) agreed.

"The main issue is availability of ethanol. States where ethanol is not produced levy higher taxes, making it economically unviable," G.C. Daga said.

As a result, of the 21 states where the blending program should already be up and running, only 11 have so far implemented the policy, Tapriya said. India has 29 states, each with its own levy-setting administration.

Ethanol in northern Haryana, which produces only a small amount of the fuel, is 20 percent more expensive than in neighboring states, for example, due to local levies.

Sugar mills say they have a combined ethanol production capacity of 1,200 million liters, sufficient to meet the demand for 10 percent blending by October 2008.

"The program I must say has started on a half-hearted note. But there is a ray of hope. The government has recently said it will declare ethanol of national importance where states will not be able to put different taxes," Tapriya said.

Other sugar mills producing ethanol share Tapriya's hopes and say the government may impose a uniform tax on ethanol in February's federal budget.

Some sugar mills, swamped with a glut and hit by a long spell of low prices, have been trying to ramp up ethanol capacity to mitigate risks. Sugar output at a record 28.4 million tonnes last year sent prices into freefall.

Tapriya added that some oil companies were issuing tenders for ethanol in a bid to drive down prices despite agreeing to stump up 21.50 rupees a liter.

"Use of ethanol as a means to support sugar mills, (promote) a clean fuel or as an alternative to expensive crude is not taking place," Tapriya said.

India's fuel import bill stood at $57.3 billion in the year to March 2007. The country imports 70 percent of its crude oil requirement.

Tapriya said Brazil had reduced its dependence on fossil fuels and cut its crude import bill drastically, and India must emulate the world's top sugar producer.

"Automobile sales are going up by leaps and bounds and demand for petrol will rise sharply. Fuels like ethanol will help India save precious foreign exchange," Tapriya said.

Biofuels, made from food crops like sugar cane, rapeseed and palm oil, are seen as an important alternative to conventional transport fuels like gasoline and diesel as oil supplies become more concentrated among a few producing countries.

But a U.N. report last November called for a five-year moratorium on biofuels, claiming they are responsible for current and futures increases in food prices, charges challenged by manufacturers. (Editing by Mark Williams and Michael Roddy)