Oil companies seek cut in cess on crude

New Delhi: State-owned oil producers ONGC and Oil India as well as private sector Cairn India have asked the government to cut cess on crude oil they have to pay in view of slump in prices.

The producers want the government to levy ad-valorem rate of cess which will result in higher payouts when prices are high and lower payout when rates fall. Currently, ONGC and OIL pay a cess of Rs 4,500 per ton on crude oil they produce from fields given to them on nomination basis. Cairn has to pay the same cess for oil from Rajasthan block.

Their association, PetroFed last week wrote to Revenue Secretary Hasmukh Adhia and Oil Secretary KD Tripathi seeking levy of 8 per cent cess on price of crude oil realised.

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 tone in July 1974 and subsequently revised from time to time.

"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 ton 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 ton (USD 10 per barrel) with effect from March 17, 2012," PetroFed wrote.

It said the government had effectively linked the cess rate to prevailing crude oil prices in the past.

"The crude oil prices have not been for sometime around USD 40 to 50 per barrel while the cess continues at the same rate as prevailing when crude oil was around USD 100 per barrel. In a low crude oil price regime, cess imposes a significant economic burden on producers," it said.

The producers said the current cess rate constitutes about 20 percent 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 UK, US, Colombia, Russia and China have changed fiscal systems to increase production and promote investments.

"It is, therefore, submitted that there is an urgent need to reduce the rate of cess in parity with prevailing crude oil prices.

Keeping in view the volatility in crude prices, it would be prudent that OID Cess may be levied at ad-valorem basis linking it to the realised crude oil prices which would be about 8 percent of the same," PetroFed said.

This, it said, would provide some predictability to oil producers and would also be in line with the historically followed policy by the government.

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 area 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 ton.