ONGC, Cairn face Rs 1,922 crore service tax on royalty payments

In a setback to energy firms like ONGC and Cairn India, the government will from this fiscal levy service tax of about Rs 1,922 crore on royalties they pay to the exchequer on oil and gas they produce.

Companies currently pay 9.09 per cent of the price they realise on oil and gas produced from onland or onshore fields and 16.67 per cent on the same from offshore areas.

The Central Board of Excise and Customs (CBEC), in a recent clarification, has stated that the licence granted by the government to a company to exploit a natural resource is a taxable service and hence liable for service tax.

The Central Board of Excise and Custom is the nodal national agency responsible for administering Customs, Central Excise, Service Tax & Narcotics in India. 

The Customs & Central Excise department was established in the year 1855 by the then British Governor General of India, to administer customs laws in India and collection of import duties / land revenue.

It is one of the oldest government departments of India. As a rule, service tax is paid by the entity providing the service, but in certain cases it is the liability of the party that receives the service to remit the levy under a system called reverse charge.

In the circular clarifying on service tax liability on use of wireless spectrum, CBEC stated that all periodic payments such as royalty on use of natural resources will attract 15 per cent service tax.

Following the clarification, the Service Tax department has sent letters to companies like Oil and Natural Gas Corp (ONGC), Cairn India Ltd and Reliance Industries seeking information on royalty payments, industry sources said.

These companies had paid a total of Rs 4,885 crore royalty on oil and gas produced in 2015-16 to the Centre and another Rs 7,932 crore to states. Considering change in prices and production profile, the service tax liability would come to over Rs 1,922 crore this fiscal on top of the royalty payout.

CBEC is using the logic that since service tax is leviable on wireless spectrum, which is a natural resources, the same should extend to oil and gas as well.

Sources said energy explorers through their association have taken up the matte with the Oil Ministry saying their profitability has been severely impacted by slump in oil and gas prices to multi-year low and the additional levy would erode it further.

CBEC in the circular stated that one-time payments for natural resources are exempt from service tax but not any periodic payments. Oil companies have to pay royalty on a monthly basis.

Exemption from payment of service tax is applicable only to “one time charge, payable in full upfront or in installments, for assignment of right to use anynatural resource and not to any periodic payment required to be made” such as Spectrum User Charges, license fee in respect of spectrum, or monthlypayments with respect to the coal extracted from the coal mine or royalty payable on extracted coal and natural resources, CBEC said.