Oil Ministry pitches for ad-valorem levy of oil cess

New Delhi: The Petroleum Ministry wants the Finance Ministry to cut cess on crude oil and make it ad valorem in view of the slump in global oil rates, Oil Minister Dharmendra Pradhan said Tuesday.

Pradhan made a case for levy of ad-valorem rate of cess, which results in higher payouts when prices are high and lower when rates fall. Currently, state-owned Oil and Natural Gas Corp (ONGC) and Oil India Ltd (OIL) pay a cess of Rs 4,500 per tonne on crude oil they produce from their allotted fields on a nomination basis. Cairn has to pay the same cess for oil from the Rajasthan block.

With oil prices dropping to an 11-year low of under USD 35 per barrel, the cess translates into one-third of the realisation going away in just one levy.

"We have asked the Finance Ministry that the cess pattern has to be changed to ad valorem from fixed rate now. Make it formula-driven," Pradhan told reporters here.

The Ministry wants cess to be levied at no more than 8 percent of the price of crude 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 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, 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 USD 100, the rate of cess went up to Rs 4,500 (USD 12 per barrel) with effect from March 17, 2012.

While the government had effectively linked the cess rate to prevailing crude oil prices in the past, there has been no reduction when the oil prices have declined.

"For a net importer of oil, availability is an issue.

Domestic production meets 20-25 percent of the oil needs. We have to protect this level and increase it. For this to happen, fiscal pattern has to be looked into," Pradhan said.

The finance ministry, he said, will take a view on the issue considering the overall finances of the government and the requirements of the economy.

The producers say the current cess rate constitutes about one-third 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 the UK, the US, and China have changed fiscal systems to increase production and promote investments.

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 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.