Pradhan pitches for cut in oil cess

New Delhi: Petroleum Minister Dharmendra Pradhan has asked Finance Ministry to cut cess on domestically produced crude oil to 10-12 percent from current 20 percent to provide relief to producers hit by slump in prices.

After oil producers including state-owned ONGC and private sector Cairn India pleaded for reduction in cess, the ministry had written to Finance Ministry to revise the rate to 10-12 percent ad-valoren or alternatively consider introducing of a graded system of cess rate.

"It should be according to market dynamics. I am recommending to Ministry of Finance to look into expectations of E&P sector," he said.

In the Budget for 2016-17, Finance Minister Arun Jaitley had moved from a fixed Rs 4,500 per ton cess on domestically produced crude oil to a percentage of oil prices or ad valorem rate of 20 per cent, a move that was supposed to give relief to upstream firms.

At crude oil price of USD 45 per barrel, the old rate of Rs 4,500 per ton and the new ad valorem rate even out and if oil prices are to go up, companies will end up paying more.

"I am hopeful the Finance Ministry will favourably consider this," Pradhan said.

The Oil Industry (Development) Act, 1974 provides for collection of cess as a duty of excise on indigenous crude oil.

This cess is a production cess which is not a pass- through and has to be borne by the oil producers.

This cess on crude oil moved to a refinery was levied at Rs 60 per tonne in July 1974 and subsequently revised from time to time.

It was Rs 900 per tonne, when India opened up its economy in 1991 and was doubled to Rs 1,800 in 2002. During 2005-06, when the crude oil prices had increased from an average of USD 40 per barrel to USD 60 per barrel, OID cess was increased from Rs 1,800 to Rs 2,500 per tonne from March 1, 2006.

Again, when the crude oil prices increased to over USD 100 per barrel, the rate of cess was increased by government to Rs 4,500 per tonne (USD 10 per barrel) from March 17, 2012, in the Budget 2012-13.

Sources said the Rs 4,500 per ton levy translated into no more than 10 percent of the oil prices even when oil prices were at their peak.

But when international oil prices slumped to decade low, putting question mark over fresh investments in exploration, Jaitley proposed to move to ad valorem rate of 20 percent. The move was to give relief to upstream firms but has turned out to be reverse, they said.

Pradhan said since OID cess is a production levy and is not passed through to the buyers, any upward revision results in higher tax incidence to the upstream companies.

In addition to cess, other statutory levies like royalty (10-20 percent), VAT (5 percent) and Octroi (4.5 percent) are also payable on production/sale of crude oil.

At prevailing crude oil prices, with the revised rate of 20 percent for cess, ONGC would end up paying almost half of crude prices towards statutory levies, source said.