New Delhi: The Finance Ministry is exploring a proposal that involves halving the cess charged on domestic production or refining of crude oil.
The proposal seeks halving cess from 20 percent (currently) to 10 percent. If accepted, reduction in cess could make gasoline prices cheaper in the country. It could also uplift the make-in-India spirits besides help domestic producers and refiners such as ONGC and Cairn India.
The proposal has been made by Oil Ministry with representations from several stakeholders including oil marketers, producers or exploring agencies, and refiners.
The oil industry is facing challenges of a supply glut and oil producers have to work around in Covid-pandemic times with several losses.
Despite the pandemic, oil explorers and refiners are being charged a cess of 20 percent on the value of oil. This is not only hurting producers but also consumers who are ultimately bearing the brunt of costly gasoline. A costlier gasoline also affects cost of vegetables and results in higher inflation.
According to several reports, the Finance Ministry has been appraised of the cess of 20 percent. A proposal to reduce the cess to 10 percent is currently being evaluated by the ministry.
If approved the reduction in oil cess may help commoners. In the case of ONGC (Oil Natural Gas Company), the benefit could be as tall as Rs 10,000 crores a year. Naturally, saving on cess may result in a small benefit to buyers of petrol and diesel.
""Cess is levied only on crude oil produced domestically. Thus, it places domestic crude oil production vis-a-vis imported crude oil at a significant disadvantage as imported crude does not attract such duty. This levy is against the spirit of 'Make in India',"" industry chamber FICCI was cited as saying in a memorandum to the Finance Ministry earlier.
The oil cess itself found a mention only in the FY17 budget. The Finance Ministry revised the part on oil cess - shifting it from specific charge of Rs 4,500 per tonne of crude to an ad valorem rate (fixed rate) of 20 per cent.
The move, back then, was to help domestic exploration firms from higher cess burden at a time when crude oil prices were falling.
With oil price moving at $40 a barrel and oil producers looking at fluctuating prices, a tweak in cess is likely to provide some relief.
The problem is magnified as cess incurred by producers is not recoverable from refineries and forms part of 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 adds to loss of revenue for exploration companies.
The government is looking to reduce tax burden on oil companies to push up domestic production that has stagnated for past several years at around 30-34 million tonne.
The reduction in oil cess would benefit upstream companies such as ONGC and Cairn India whose production is subjected to the oil industry development cess levied on an ad valorem basis.
But under the new open acreage licensing policy (OALP), which provides pricing and marketing freedom to operators along with the power to select the block for exploration, does not attract oil cess. This puts the older oil and gas blocks at a disadvantage to any new hydrocarbon finds.
Currently, state-owned ONGC and OIL pay a cess on crude oil they produce from their allotted fields on a nomination basis. Cairn India has to pay the same cess for oil from the Rajasthan block.
Most of crude oil produced in India comes from pre-NELP and nomination blocks and is liable for payment of cess. NELP blocks like Reliance Industries' KG-D6 are exempt from payment of cess while pre-NELP discovered blocks like Panna/Mukta and Tapti and Ravva pay a fixed rate of cess of Rs 900 per tonne.
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 $40 per barrel to $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 $100, the rate of cess went up to Rs 4,500 ($12 per barrel) with effect from March 17, 2012.
*With inputs from IANS.