For the first time in over four decades, the Government is likely to convert a cess on domestically produced crude oil into an ad-valorem rate from a fixed per tonne levy, at present.
The Budget for 2016-17, the second full year Budget by Finance Minister Arun Jaitley is likely to make changes in the way Oil Industry Development Cess is levied to provide relief to companies like ONGC and Cairn India that are being battered by oil prices plunging to 11-year low.
“There are indications the Budget may announce an ad valorem rate of cess instead of Rs 4,500 per tonne fixed levy currently,” a senior government official said.
The ad valorem rate of cess will results in higher payouts when prices are high and lower when rates fall. Currently, state-owned Oil and Natural Gas Corp (ONGC) and Oil India Ltd (OIL) pay a cess of Rs 4,500 per tonne on crude oil they produce from their allotted fields on a nomination basis. Cairn has to pay the same cess for oil from the Rajasthan block.
With oil prices dropping to an 11-year low of under USD 35 per barrel, the cess translates into one-third of the realisation going away in just one levy.
The Budget may fix the levy at around 8-9 per cent of the crude oil price, the official said.
The Oil Industry (Development) Act, 1974, provides for collection of cess as a duty of excise on indigenous crude oil. Cess incurred by producers is not recoverable from refineries and thus, forms part of cost of production of crude oil. 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 USD 40 per barrel to USD 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 USD 100, the rate of cess went up to Rs 4,500 (USD 12 per barrel) with effect from March 17, 2012.
While the government had effectively linked the cess rate to prevailing crude oil prices in the past, here has been no reduction when the oil prices have declined.
The official said the Oil Ministry has made a formal representation to the Finance Ministry for making the cess ad valorem. Also, companies like Cairn as well as industry associations too have made similar representations.
Oil producers say the current cess rate constitutes about one-third of the oil price, which has severely impacted several small discoveries and marginal fields, making many of the projects unviable.
In the low oil price environment, several countries including the UK, the US, and China have changed fiscal systems to increase production and promote investments.
Most of crude oil produced in India comes from pre-NELP and nomination blocks and is liable for payment of cess.
While New Exploration Licensing Policy (NELP) blocks like Reliance Industries’ KG-D6 are exempt from payment of cess, pre-NELP discovered blocks like Panna/Mukta and Tapti and Ravva pay a fixed rate of cess of Rs 900 per tonne.