Crude cess to ease burden on upstream oil firms

The imposition of 20% Ad Valorem cess is expected to translate into net savings of Rs 2,158 crore for the state-run explorer ONGC

The Budget announcement of 20 per cent cess on domestic crude oil production will bring down the burden of upstream oil companies - Oil and Natural Gas Corporation (ONGC), Oil India (OIL) and private sector Cairn India - on account of the levy by 28 per cent to Rs 10,303 crore in the next financial year.

The companies had been paying cess at a specific rate of Rs 4,500 per tonne of production and had shelled out Rs 7,600 crore in the first half (April-September) of current financial year. The Union Budget presented on Monday has pegged the total cess collection from companies at around Rs 14,962 crore in 2015-16 as part of tax revenue.

However, the imposition of Ad Valorem cess has not gone down too well with a large section of the industry that had been clamoring for a shift in the cess to an ad valorem rate of between 8-10 per cent. Partly because the 28 per cent cut in burden on a count of cess comes after over 50 per cent drop in global crude oil prices since June last year.

The imposition of 20 per cent ad valorem cess is expected to translate into net savings of Rs 2,158 crore for the state-run explorer ONGC. If the government had fixed the rate of cess at 10 per cent, as demanded by the industry, the net gain for the company would have been more than Rs 4,000 crore.

Experts point out the benefit of the ad valorem cess would accrue to exploration and production companies only as long as the global crude oil prices remain within the $45 per barrel mark. "The cess directly impacts margins of local producers like ONGC and Cairn India etc. If the price of crude settles at about $35 per barrel, it will bring saving of about $2 per barrel. However, if the crude price goes up to $45 it will mean no change in cess cost," said Aditya Gandhi, Director-Technology at consulting firm Sapient Global Markets.

He said at $100 per barrel price of crude, the cess cost will increase by $11 per barrel. "Given that crude prices are expected to settle in the $30-45 range in the near term, this should be a positive for these companies for now," he said. In the Union Budget 2016-17 proposals, the government had said, "Clause 222 seeks to amend the Schedule to the Oil Industry (Development) Act, 1974 so as to levy cess at the rate of twenty per cent, ad valorem instead of the present rate of Rs 4,500 per tonne, on domestically produced crude oil."

The Oil Industry (Development) Act of 1974, provides for cess collection as a duty of excise on domestic crude oil. Cess incurred by producers cannot be recovered from refineries and therefore forms part of cost of production of crude oil.

The petroleum sector's contribution to the centre's total tax collection in the form of cess on crude oil stood at Rs 16,000 crore in each of the last three financial years (2012-13, 2013-14 and 2014-15).

The companies also paid excise duty of Rs 99,000 crore, customs duty of Rs 4,767 crore and around 3,858 crore as royalty last fiscal, according to the oil ministry's data.

The government is also budgeting for a 15 per cent jump in non-tax revenue from the petroleum sector at Rs 12,401 crore in 2016-17 as compared to Rs 10,756 crore in the Revised Estimate of 2015-16, according to the Budget documents. This largely includes payments of royalty and profit petroleum by exploration companies.