New Delhi, Feb. 18: The government is considering a duty rejig for petroleum products to bridge the gap between global crude prices and domestic retail prices that persists despite last week’s rise in petrol and diesel prices.

This is also expected to send the right political message to the electorate before the assembly polls this year and the general elections later.

Officials said last week’s price hike of Rs 1 per litre of diesel and Rs 2 for a litre of petrol would bridge only Rs 840 crore of the Rs 71,000-crore gap between costs of fuels and their prices.

Though oil bonds — which is the debt that the government incurs to subsidise fuel prices — will cover about 57 per cent of the gap, a large deficit still needs to be addressed.

To bridge the deficit, the petroleum ministry has long been pushing for a rationalisation of duties on petroleum products. The government seems to have agreed to the proposal only recently and may do the rejig in the budget.

Reductions in duties will shrink government revenues by Rs 15,530 crore. The government is confident of cushioning the impact, given the high tax collections in this fiscal.

However, the finance ministry is unlikely to accept the specific duty structure suggested by the Rangarajan Committee, in place of the present ad valorem duty.

The government had set up the committee, headed by C. Rangarajan, chairman of the economic advisory council to the Prime Minister and a former Reserve Bank governor, to make recommendations on pricing and taxation of petroleum products.

Besides duties, the petroleum ministry along with exploration and production companies have discussed tax holidays and service taxes with the finance ministry.

An exploration and production entity is now allowed a full tax holiday for seven consecutive years from the year of production.

The demand now is either a full tax holiday for 10 consecutive years from the year an entity starts making profits beyond a certain threshold or a holiday for seven consecutive years, to be chosen by the entity, in the first 15 years of production.

Exploration and production firms are also concerned about the tax of 12.36 per cent on services such as drilling and seismic surveys.

Firms have also demanded declared goods status on natural gas, leading to a uniform sales tax of 4 per cent across the country. Under current rules, gas attracts a sales tax of as much as 22 per cent in some states.