Oil & gas industry seeks slashing of cess on crude

New Delhi: As oil prices dip to multi-year lows, an association of top energy firms has asked the government to slash the Rs 4,500 per tonne cess on crude oil and gradually phase it out to provide fiscal stability.

The Association of Oil and Gas Operators, which is made up for over two-dozen members including Reliance Industries, ONGC, Cairn, BP, BG, BHP and Essar, has written to Oil Secretary, demanding ad-valorem rate of cess instead of current Rs 4,500 per tonne cess.

The change to ad-valorem cess rate will "spur investments for additional oil from existing players and create a level playing field between pre-NELP and NELP participants", it said.

It would also align India with global best practices and reduce legislative burden as in crease in oil price shall be automatically captured without intervention.

The Oil Industry (Development) Act, 1974 provides for collection of cess as a duty of excise on indigenous 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 per barrel, OID Cess was increased from Rs 1,800 to Rs 2,500 per tonne from March 1, 2006.

When the crude oil prices increased to over USD 100 per barrel, the rate of cess was increased to Rs 4,500 per tonne with effect from March 17, 2012.

Oil prices have over the past year halved to about USD 50 per barrel.

AOGO demanded "change the rate of cess to an ad-valorem basis, bringing it to a single digit number (say 5-7 percent). This will make it more progressive regime protecting the producers in low price era, and ensuring an upside to government take in higher price era".

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 tonne.

AOGO said the change to ad-valorem rate would "provide fiscal stability to pre-NELP contract licensees at the levels provided for the time of signing those contracts".

It further demanded that the cess should be brought "down to the NELP rates (0 percent) over a period of time."

The combined impact of low prices and high cess is likely to make some of existing fields unviable to operate, it said.