Ad valorem rates likely for levying cess on crude oil

Govt levies a cess of Rs 4,500 per tonne on crude oil produced by state-run firms ONGC and Oil India from fields given to them on a nomination basis

The petroleum ministry is set to recommend to its finance counterpart switching to ad valorem rates for levying cess on crude oil from the current fixed rate of Rs 4,500 per tonne. The move follows multiple representations by the domestic industry to align cess on crude oil to international crude oil prices.

If implemented, the proposal would benefit the likes of Vedanta subsidiary Cairn India, which operates the Barmer block in Rajasthan, India’s largest on-land oil and gas field. “The government is in-principle in favor of having ad valorem rates for cess. We are currently collecting data on the subject (global crude prices and the quantum of cess imposed domestically) and later approach the finance ministry with the proposal,” said a senior oil ministry official.

The government levies a cess of Rs 4,500 per tonne on crude oil produced by state-run firms Oil and Natural Gas Corp (ONGC) and Oil India from fields given to them on a nomination basis. It is also levied on Cairn's Rajasthan field but is not levied on areas awarded under New Exploration Licensing Policy, including KG-D6 of Reliance Industries.

Cairn and ONGC have written to the government for relief on levy of cess, citing the production sharing contract (PSC) for Rajasthan field, which is silent on such a levy and does not specify any rate. Cairn argues the levy was taking away nearly a fifth of revenue from the Rajasthan fields at a time when oil prices have halved.

The oil ministry official quoted above also said the government approved Cairn India’s plea for an extension of the PSC for the Rajasthan block in-principle but with certain conditions. The government is understood to have asked for the investment plan for the renewal period to assess the extent to which the state’s share of profit can be raised. Cairn is seeking to extend the contract by 10 years after the 20-year agreement expires in 2020.