BUDGET WISH LIST. Cessed out

The prevailing 20-per cent cess on crude is a debilitating blow on domestic oil producers. For a nation that meets more than 80 per cent of its oil requirements through imports, the need of the hour is to undo this anomaly and immediately reduce it to a reasonable rate of 8 per cent. A rationalised cess will give a much-needed breather to domestic oil producers and pave the way for further investments, expansions and explorations. Even if the lower cess rate will entail temporary loss of revenue for the Government, the boost in production will eventually yield much higher revenues in the form of royalty, profit petroleum and corporate taxes .

The cess on crude oil was introduced as a temporary measure back in 1974 when the Oil Industry (Development) Act provided for its collection to part-fund domestic exploration. Today, 43 years on, cess on domestic crude oil continues long after it has outlived its utility. Cess was originally levied at ₹60 per tonne in July 1974 and subsequently revised from time to time. During 2005-06, when crude oil prices rose sharply from an average of $40 per barrel to $60 per barrel, the OID Cess was raised from ₹1,800 to ₹2,500 per tonne in March, 2006. The cess incurred by producers is not recoverable from refineries and, thus, forms part of the cost of production of crude oil. Again, when crude shot up to over $100 per barrel in 2012, the rate of cess was increased by the government to ₹4,500 per tonne, effectively linking the cess rate to prevailing crude oil prices.

As the average monthly oil price in 2012 was approximately $100/barrel, in percentage terms, the cess of ₹4,500/tonne worked out to be about 8 per cent of crude oil price. However, from July 2014 onwards, the prices started to slump from over $100/barrel and fell sharply to $30 a barrel in November 2014 when OPEC countries declined to cut production and instead started maximizing production to garner a larger market share. At crude oil prices of $35-40 a barrel, the fixed cess of ₹4,500/tonne ( nearly 25 per cent) became overbearingly prohibitive from the erstwhile rate of 8 per cent equivalent. Waking to the situation, the Government attempted to give some relief to the industry in the Union budget of February 2016 by connecting cess to an ad valorem regime and making it 20 per cent of the per-barrel cost. But the relief was too little, too late.

With crude oil prices have started moving up again, domestic producers, saddled with the 20 per cent ad valorem cess, are at a distinct disadvantage and in fact, much worse off than before. The need to cut the cess rate is urgent and the upcoming Union budget presents a perfect opportunity for the Government to make the correction. A reduced cess will ensure an efficient and progressive sharing of tax burden across price regimes.

For the Indian upstream industry, the steep rate of cess severely affects its ability to invest in complex, capital-intensive oil exploration and development projects. A Parliamentary Committee headed by BJP’s Prahlad Joshi has also recommended that cess should be halved to make it more practical and effective. If domestic oil producers have to fulfil Prime Minister Modi’s vision to increase production and reduce import dependence by 10 per cent by 2022, the least they need is a level-playing field and a rational tax regime.

The writer is Partner at Khaitan & Co. The views are personal

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