Only central sales tax can be levied on crude oil: Govt

Rajasthan wants 3% tax on output from Cairn’s oilfield

In an attempt to stop states from levying local sales tax on inter-state transactions, the Centre has told Rajasthan that only Central Sales Tax (CST) can be levied on crude oil sold from Cairn India’s fields in the state to refiners elsewhere.

Rajasthan wants to charge 3 per cent state sales tax or VAT on 8.75 million tonnes a year of peak output from Cairn’s Barmer district fields on oil being consumed or processed at refineries outside the state.

Petroleum Secretary R S Pandey last month wrote to Rajasthan Chief Secretary Kushal Singh saying: “State sales tax/VAT would accrue to Rajasthan government in case the sale of crude oil is made for further processing within Rajasthan.”

State refiners Indian Oil, Mangalore Refinery and Hindustan Petroleum have been nominated to buy crude from Cairn but none of them has refineries in Rajasthan and will necessarily have to transport the oil to their units outside the state for processing.

“(One per cent) Central Sales Tax would accrue to Rajasthan government if the sale is made in Rajasthan and crude oil has to be necessarily carried outside for refining,” Pandey wrote. “CST is, however, due to be abolished by March 31, 2010.”

The move by Rajasthan may set a precedent wherein mineral producing states like Jharkhand may insist on payment of local sales tax even if resources such as coal are sold and consumed outside the state.

Pandey cited the opinion of the Department of Revenue in the Union Ministry of Finance to make a point to the state government. The finance ministry, he said, clearly stated that “...in case the crude oil is sold within Rajasthan state, say to a refinery set up within its territory, Rajasthan Sales Tax/VAT as applicable on crude oil under the relevant State Act would be leviable”.

“In case the sale of crude oil takes place in Rajasthan state, but the crude oil has to be necessarily carried outside the state of Rajasthan for refining, the sale transaction will be deemed as having taken place in course of inter-state trade and would be subject to levy of CST,” the finance ministry’s opinion said.

“You may like to make use of the above cited views of (Union) Ministry of Finance in deciding on the applicability of tax on crude oil produced in Barmer field,” Pandey wrote to Kushal Singh on August 18.

Cairn began crude oil production from its Rajasthan fields on August 29. The government has nominated Indian Oil Corp (IOC), Hindustan Petroleum Corp (HPCL) and Mangalore Refinery and Petrochemicals (MRPL) for purchasing crude oil from Cairn India’s Rajasthan fields.

IOC and MRPL have been allocated 0.20 million tonnes each in the remainder of the financial year 2009-10, while HPCL’s offtake would be 0.30 million tonnes. IOC will process the crude at its Koyali refinery in Gujarat and Panipat unit in Haryana, while MRPL will ship the oil to Mangalore in Karnataka. HPCL will take the oil to either its Mumbai or Vizag refinery.

Cairn is laying a pipeline to transport the crude from Barmer in Rajasthan to the Gujarat coast from where MRPL and HPCL will move the oil in ships. The pipeline will connect to IOC’s existing networks for taking it to Koyali and Panipat.

In 2010-11, IOC would buy 1.5 million tonnes of the crude oil, while MRPL would double its offtake to 0.40 million tonnes. HPCL would take 0.50 million tonnes.

Cairn’s production will almost match with offtake this year, but in 2010-11 it will produce 125,000 barrels per day (over 6 million tonnes a year) while the offtake will be 48,000 bpd.