ONGC, Cairn India demand halving of cess on crude oil

New Delhi: State-owned ONGC and private sector Cairn India have demanded halving of cess on domestic crude oil production saying their burden has actually gone up after Finance Minister Arun Jaitley's Budget exercise aimed at reducing the levy.


Oil and Natural Gas Corp (ONGC) paid Rs 4,500 per tonne cess on crude oil it produced from almost all its fields including prime Mumbai High, till February 2016. In Budget for 2016-17, Jaitley changed the cess from specific levy to an ad valorem rate of 20 percent of crude oil price.

However, at the current oil prices, ONGC and other oil firms like Cairn are paying more than Rs 4,500 per tonne cess.

Sources privy to the development said the two firms have made representation to the government saying the Rs 4,500 per tonne equals to 20 percent ad valorem duty when oil price crosses $44 per barrel.

And with oil prices ruling higher, the net impact of an exercise which was aimed at giving relief to domestic oil producers, is that they have to pay more now, they said.

Historically, the Oil Industry Development (OID) cess was first levied in 1970s at the rate of Rs 60 per tonne. Over the next decades it was hiked few times. It was Rs 900 per tonne, when India opened up its economy in 1991 and was doubled to Rs 1,800 in 2002. In 2006, it was hiked to Rs 2,500 per ton when international oil price was $60 per barrel. It was further hiked to Rs 4,500 per ton in 2012 when oil pries were over $100 per barrel.

Sources said the 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.

ONGC and other upstream players have sought reduction in cess to 8 to 10 percent as the purpose of Budget exercise to rationalise the cess has been defeated even at current moderate crude prices.

In a low crude oil price regime, cess imposes a significant economic burden on producers, they said.

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 fro cess, ONGC would end up paying almost half of crude prices towards statutory levies, source said.

Moreover, since both royalty and OID cess are production levies and not pass through to buyers, it adds up in cost of production of crude oil.

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.

During 2005-06, when the crude oil prices had increased from an average of $40 per barrel to $60 per barrel, OID cess was increased from Rs 1,800 to Rs 2500 per tonne from March 1, 2006.

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

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Updated Date: Jul 26, 2016 16:40:30 IST

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