The oil sector can hope to get some relief from Budget 2019-20 with the government considering a proposal to halve the cess on domestic crude oil to encourage exploration activity and allow explorers to step up investment in search for new hydrocarbon reserves, official sources said on Tuesday.
Cess on domestic crude is currently levied at the rate of 20 per cent of the value of oil. This may come down to 10 per cent if a proposal given by industry and the Petroleum Ministry is accepted by the Finance Ministry for inclusion in this year's budget.
According to the sources, while there is strong support for halving the cess, the exact quantum of cut is still to be worked out. The reduction in the levy has huge revenue implications as state-run ONGC alone pays cess in excess of Rs 10,000 crore annually.
The Finance Ministry had revised the oil cess in the Union Budget 2016-17, shifting it from the specific charge of Rs 4,500 per tonne of crude to an ad valorem rate of 20 per cent. This was done to save the exploration firms from a higher cess burden at a time when crude oil prices were falling. But with the reversal of the pricing scenario now, the value-based taxation has again begun to hurt the sector.
"..Cess is levied only on crude oil produced domestically. Thus, it places domestic crude oil production vis-a-vis imported crude oil at a significant disadvantage as imported crude does not attract such duty. This levy is against the spirit of 'Make in India'," industry chamber FICCI said its pre-budget memorandum to the Finance Ministry.
Though crude oil prices have fallen in June with Brent now hovering around $62 a barrel, pressure points in terms of squeezing supplies from major oil markets such as Venezuela and Iran, extension of production cuts by the Organization of Petroleum Exporting Countries (OPEC) and tension in the Gulf region remain as factors that can reverse the current pricing cycle.
"The benefit that the sector got in the Budget 2016 has vanished as a 20 per cent cess on domestic crude is working out to a charge of over Rs 6,000 per tonne for upstream companies. This is higher than what we were paying when government levied specific cess on crude," said an official of a public sector oil company asking not to be named.
The problem is magnified as cess incurred by producers is not recoverable from refineries and forms part of the cost of production of crude oil. The Oil Industry (Development) Act, 1974, provides for collection of cess as an excise duty on domestic crude oil. This adds to a loss of revenue for exploration companies.
The reduction in oil cess would benefit upstream companies such as ONGC and Cairn India whose production is subject to the oil industry development (OID) cess levied on an ad valorem basis. This increases the financial burden on companies whenever there is an increase on crude oil prices.
But under the new Open Acreage Licensing Policy (OALP), which provides pricing and marketing freedom to operators along with the power to select the block for exploration, output does not attract oil cess. This puts the older oil and gas blocks at a disadvantage as compared to any new hydrocarbon finds.
Currently, both ONGC and OIL pay a cess on crude oil they produce from their allotted fields on a nomination basis. Private player Cairn India has to pay the same cess for oil from its Rajasthan block.
Most of the crude oil produced in India comes from the pre-NELP and nomination blocks and is liable for payment of cess. New Exploration Licensing Policy (NELP) blocks like Reliance Industries' KG-D6 are exempt from payment of cess while pre-NELP discovered blocks like Panna/Mukta as well as Tapti and Ravva pay a fixed rate of cess of Rs 900 per tonne.
The cess was levied at Rs 60 per tonne in July 1974 and subsequently revised from time to time. In 2005-06, when the crude oil prices had increased from an average of $40 per barrel to $60, the OID cess was raised from Rs 1,800 to Rs 2,500 per tonne from March 1, 2006. Again, when the crude prices climbed to over $100, the rate of cess went up to Rs 4,500 ($12 per barrel) with effect from March 17, 2012.