The Union government is likely to cut import duties on diesel, kerosene and cooking gas to cushion the impact of high international crude oil prices on the domestic market.

Except for LPG, which the country is short of and has to import, the government finances will not be affected by the move as the other two products are not imported at all.

However, the customs duty will be included in the final retail price of the product.

"Once we knock off the customs duty element, product price thus arrived at will be lower and provide cushion to the oil companies," government sources said.

The proposal to cut customs duty was among the remedies discussed between senior officials of finance and petroleum ministries on Friday.

A 20 per cent customs duty is levied on diesel imports and 10 per cent each on kerosene and LPG. As per the present practice of arriving at the retail price, these duties are added to the ruling import price to finalise a refinery gate price.

To this refinery gate price are added excise and other duties, sales tax and dealer commission to come to the retail selling price.

The current diesel price of Rs 21.73 per litre includes a Rs 2.30 customs duty component, an amount almost equivalent to the hike oil companies have been seeking commensurate with the $6 a barrel jump in crude oil prices.

Similarly, LPG price of Rs 241.59 per cylinder has an import duty component of Rs 27 and the Rs 9.01 per litre price of kerosene has about Re 1 customs duty component.

Sources said the petroleum and finance ministries are working out a comprehensive policy for pricing of petrol, diesel, LPG and kerosene and a system for insulating domestic economy from the volatilities of international oil market.

As a result the public sector oil companies may be asked to bear a part of the burden resulting from crude prices peaking to 21-year high of $42 a barrel.

"Oil companies may be asked to bear part of the Rs 130 per cylinder hike in LPG price, while the government extends the subsidy it provides by two more years to 2007," they said.

Other measures being discussed include introducing fixed duties (expressed in rupees per litre) instead of the present practice of levying ad-valorem duties (expressed in percentage rate), which tend to escalate retail price if input prices rise.

Creation of a price stabilisation fund on the lines of oil pool account, which would compensate oil firms during times of high prices was also being discussed.

Already, the high crude prices have drilled deep holes in pockets of public sector oil firms, which have for political reasons not been allowed to raise petrol and diesel prices for the past five months and LPG and kerosene prices since 2002, in step with the rise in cost of raw material.

Public sector oil companies lost Rs 900 crore (Rs 9 billion) on selling petrol and diesel below the cost since January and the estimated under-recovery on LPG and kerosene is being put at Rs 14,000 crore (Rs 140 billion) in 2004-05.