The Finance Ministry has decided to turn a deaf ear for the time being to the demand made by the Ministry for Petroleum & Natural Gas to calculate cess on domestic crude oil at the cost of production.

Currently, the cess is levied at a fixed rate – ₹4,500 a tonne. The cess rate constitutes about 20 per cent of the Brent.

But, if it is made ad-valorem (or at cost) it will become market linked. While the cess amount has increased with the rise in crude oil prices, it has not reduced accordingly. The cess is not a pass through and therefore has to be borne by the producers.

A senior official in the Finance Ministry said that this demand is always made by the domestic oil producers whenever the crude oil prices are low. “No immediate decision can be expected at this point. Besides, the crude oil prices have again started hardening…we will see how the situation pans out closer to the Budget,” the official told BusinessLine .

The Finance Ministry’s decision on cess is also influenced by the fact that at present the government’s maximum earnings are coming from the savings on account of fuel subsidy and earnings from the increased duties – both customs and excise – on crude oil and petroleum products.

The country’s oil subsidy bill has come down by at least ₹20,000 crore due to lower crude oil prices, and excise duty almost doubled to ₹80,208 crore by August end.

Led by Cairn India, the domestic oil producers have been seeking reduction in cess amount to ₹2,500 a tonne from the current ₹4,500 a tonne. The government levies cess on domestic crude oil production as a duty of excise. The current level of cess was imposed in the Budget of 2012-13, when the crude price was over $ 100 a barrel. The crude price has since dropped significantly.

The Petroleum Federation of India last month wrote to Revenue Secretary Hasmukh Adhia and Petroleum Secretary KD Tripathi seeking intervention.

When the government had doubled the cess amount, Cairn had approached the then Prime Minister’s office seeking review as it was only the Rajasthan block production sharing contract which was materially affected by this increase.

While the Petroleum Ministry had then agreed that it would adversely affect Cairn, it had left the private sector explorer to fight its own battle. NELP (New Exploration Licensing Policy) PSCs are exempted from cess. For most other blocks offered before the licensing rounds and producing crude oil like Ravva and Panna-Mukta-Tapti joint venture fields, cess is fixed at ₹900 a tonne.

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