Budget 2021

Budget 2016: Oil & gas strikes gold

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What's changed

Unlike earlier years, this Budget had a lot for hydrocarbon companies, thanks to both commissions and omissions by the Finance Minister.

Cairn India, ONGC and Oil India can heave a sigh of relief. The Finance Minister has acceded to their pleas for a cut in the cess on domestically produced crude oil. So, from a fixed ₹4,500 a tonne which translated to about $9 a barrel, the cess calculation has been changed to 20 per cent on ad valorem basis. At current prices, the cess will reduce to about $6 a barrel.

The 20 per cent cess falls much short of the about 8 per cent cess sought by the oil companies. But it is still better than the fixed rate, given the oversupplied global crude oil market which could keep prices depressed. The cess is applicable to output from blocks allotted outside the NELP mechanism such as the Rajasthan fields operated by Cairn.

Oil refiners such as Indian Oil, HPCL and BPCL must also be relieved that the Budget did not increase the Customs duty on crude oil. There was speculation that the Customs duty on crude oil would be increased to 5 per cent from zero currently. This would have impacted the profit of the refiners since the pricing of products such as petrol and diesel in the country is based on their import prices, and not on the cost of crude oil.

The Budget also seeks to incentivise gas production in difficult terrains by providing calibrated marketing freedom. But details are sketchy, as the proposal is under consideration and comes with strings attached. One, the ceiling price, is to be discovered on the principle of landed price of alternative fuels — this could lead to arbitrary pricing formulae again. Also, the marketing freedom will apply to new discoveries and areas which are yet to commence production. So, producing assets such as the KG-D6 field operated by Reliance Industries will not get the benefit. The proof of the pudding will be in the eating.

Interestingly, the Budget has proposed to exempt from tax the income of foreign companies that accrues to them from storage of crude oil in India and its sale. This seems to be the groundwork to allow countries such as the UAE make use of the strategic oil reserve facilities being built in India.

A negative for upstream companies is the proposal to provide no deduction under Section 80IB to undertakings that commence production after April 2017. This seems to be in line with the policy of the government to phase out exemptions over the years while also moderating corporate tax rates. Another disappointment is the Budget not exempting exploration activities from service tax, a long-pending request of upstream companies.

The background

The rout of crude oil took a toll on domestic upstream companies; the high cess on the fuel, which was fixed when prices were ruling high, added to the pain. The government was expected to shore up its finances by imposing customs duty on crude oil.

The verdict

The Finance Minister has kept in mind the interests of both producers and refiners. He could have done more, though.

Published on February 29, 2016

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