That Arun Jaitley’s 2016-17 Budget will be influenced by crude oil prices doesn’t require second guessing. But to what extent the Finance Minister will use soft crude oil prices to his advantage is what has everyone hooked.

Will Jaitley pay heed to the request of Petroleum & Natural Gas Minister Dharmendra Pradhan and favourably tweak the imposition of cess on domestically produced oil?

“We have made a request to the Finance Minister that the cess rate be changed to an ad-valorem basis… I am hopeful,” Pradhan told BusinessLine .

The Oil Industry (Development) Act provides for a cess as duty of excise on indigenous crude oil. This is a production cess, and has to be borne by the producers as it is not a pass through. According to industry calculation, the cess today stands at more than 20 per cent of crude oil prices. The industry fears that small discoveries and marginal fields will face project viability issues if this anomaly is not corrected.

Not only does it put companies which are producing from areas awarded prior to the licensing round at a disadvantage vis-à-vis New Exploration Licensing Policy (NELP) acreages, but also against imports.

The cess is not applicable to domestic oil produced from blocks auctioned under NELP.

In 2005-06, when crude oil prices had increased to $60 a barrel, the cess was ₹2,500 a tonne. When oil hit $100 a barrel in 2012, the cess was increased to ₹4,500 a tonne. It remains unchanged even now, when the average price (April to date) at which Indian refiners bought is at $47.46 a barrel.

Ad-valorem rate

It is clear that the Centre has linked the cess rate to prevailing crude oil prices, say players such as ONGC and Cairn India, while seeking a level playing field. They want the cess rate to be made ad-valorem — approximately 8 per cent of the realised price — subsequently bringing it down to a single digit, and eventually to zero.

While cess is one side of the coin, the other is import duty on crude oil. The imposition of import duty is what Jaitley’s Budget team wants in order to benefit from low oil prices. Currently, there is no import duty on crude oil.

Though the stage for imposing such a duty was set in 2015-16 as well, Jaitley had refrained from doing so.

Besides these, the industry is also looking at some fiscal management, said Gokul Chaudhri, Leader, Direct Tax, BMR & Associates LLP. “It is important that the Budget brings adequate clarity on the long-standing demands of the industry. It needs to clarify on whether mineral oil includes natural gas or not, and introduce full price deregulation for LPG as well,” he said.

The softening of global crude oil prices has helped Jaitley by bringing down import bills, reducing oil subsidy, and using the oil money for his other commitments.

Eyes are also on what is the average crude oil price the Finance Minister will take for the new fiscal. Indications are that he might take an average of about $50 a barrel, as he is conscious that oil price fundamentals are tricky and challenging.

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