Cess likely to be halved on domestic crude

January 2021
Cess likely to be halved on domestic crude

The Centre may give a “Make in India” push to oil and gas explorers, as it is considering a proposal for almost halving cess on domestic crude oil to encourage exploration activity and allow the pandemic-hit oil producers to protect their margins.

Crude oil prices were pushed down to unprecedented levels due to the glut in the oil market and deep suppressing demand during the peak-pandemic period in 2020.

Cess on domestic crude is currently levied at the rate of 20% of the oil value. Official sources said the proposal by the Ministry of Petroleum and Natural Gas (MoPNG) is to reduce it to 10%. If the Finance Ministry accepts this, the changes may be announced as part of Budget 2021 proposals, said sources.

Though the larger view favours halving the cess, the exact quantum would be worked out later. The levy reduction has huge revenue implications as Oil and Natural Gas Corporation Ltd (ONGC) alone pays over Rs 10,000 crore annually.

The changes would also provide a level playing field to domestic companies as imported crude does not attract cess.

In the FY17 Budget, the Finance Ministry had revised oil cess, shifting it from a specific charge of Rs 4,500 per tonne of crude to an ad valorem rate of 20%. This was done to help the exploration firms from higher cess burden when crude oil prices were falling.

Though oil prices are moving at over Rs 3,647 a barrel for some time now, fluctuations in pricing always put domestic crude producers at a disadvantage. The problem is magnified as cess incurred by producers is not recoverable from refineries and forms part of the production cost of crude oil. The Oil Industry (Development) Act, 1974, provides for the collection of cess as a duty of excise on indigenous crude oil. This adds to the loss of revenue for exploration companies.

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The government is planning to reduce the tax burden on oil companies to rev up domestic production that has stagnated for several years at around 30-35 million tonne.

The reduction in oil cess would benefit upstream companies such as ONGC, and Cairn India, whose production is subjected to the oil industry development levied on an ad valorem basis.

Under the new open acreage licensing policy (OALP), which provides pricing and marketing freedom to operators and the power to select the block for exploration, it does not attract oil cess. This puts the older oil and gas blocks at a disadvantage to any new hydrocarbon finds.

ONGC and Oil India Ltd (OIL) currently pay a cess on crude oil they produce from their allotted fields on a nomination basis. Cairn Oil and Gas has to pay the same cess for oil from the Rajasthan block.

Most of the crude oil produced in India comes from pre-New Exploration Licensing Policy (NELP) and nomination blocks and is liable for payment of cess. NELP blocks like Reliance Industries' KG-D6 are exempt from payment of cess while pre-NELP discovered blocks like Panna/Mukta and Tapti and Ravva pay a fixed rate of cess of Rs 900 per tonne.

The cess was levied at Rs 60 per tonne back in July 1974 and subsequently revised from time to time. In 2005-06, when the crude oil prices had increased from an average of Rs 2,917 per barrel to Rs 4,376, the oil industry development (OID) cess was raised to Rs 2,500 per tonne from Rs 1,800 from March 2006. When the crude prices climbed to over $100, the rate of cess went up to Rs 4,500 with effect from March 2012.

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