Cess on domestic crude output will now be ad valorem-based

Meeting half-way the demand of domestic oil producers to link cess on crude oil to prevailing price, Jaitley in his Budget for 2016-17 change cess on crude oil to 20 per cent of the prevailing oil price as compared to Rs 4,500 per tonnes currently.

At $35 per barrel oil price, this essentially means Oil and Natural Gas Corp (ONGC) will have to pay Rs 3,500 per ton cess on crude oil it produces from fields given to it on nomination basis. The same will be the rate for Cairn India’s Rajasthan oil fields.

These firms had wanted cess to be levied at 8-10 per cent of the oil prices, which slumped to an 11-year low.

The Oil Industry (Development) Act, 1974, provides for collection of cess as a duty of excise on indigenous crude oil. Cess incurred by producers is not recoverable from refineries and thus, forms part of cost of production of crude oil. The cess was levied at Rs 60 per tonne in July 1974 and subsequently revised from time to time. In 2005-06, when the crude oil prices had increased from an average of $40 per barrel to $60, the OID cess was raised from Rs 1,800 to Rs 2,500 per tonne from March 1, 2006. Again, when the crude prices climbed to over $100, the rate of cess went up to Rs 4,500 ($12 per barrel) with effect from March 17, 2012.

“The Oil Industry (Development) Act 1974 is being amended so as to reduce the rate of Oil Industries Development Cess on domestically produced crude oil, from Rs 4,500 per tonne to 20 per cent ad valorem OIDB Cess. The amendment in the Act will be effective from the date of assent to the Finance Bill, 2016,” the Finance Bill said. Jaitley in his budget speech in Lok Sabha said two stage gas pricing freedom would be given to firms like RIL and ONGC who have several gas discoveries that are unviable at current price of $3.82 per million British thermal unit.

“India is blessed with rich natural resources including oil and gas. However, their discovery and exploitation has been below our potential,” he said. With near stagnation in domestic production and consequent rapid increase in imports, the “Government is considering to incentivise gas production from deep-water, ultra deep-water and high pressure-high temperature areas, which are presently not exploited on account of higher cost and higher risks,” he said.