Indian taxes a roadblock in biofuel drive

By Mayank Bhardwaj

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 litre 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, 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 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 programme 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.