Cess on domestic oil exploration should be abolished in budget

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By: K R Sudhaman

Ahead of budget 2021, domestic oil producing companies demanded abolition of cess on domestic oil exploration and production to revive the industry struggling due to fall in crude oil prices coupled with demand pull with the unprecedented Covid 19 Pandemic  causing severe bruises to the already stressed economy.

This is one sector, which saves huge foreign exchange reserves and promotes Atma Nirbhar Bharat. It has so far escaped government attention in providing fiscal stimulus to ward off the ill effects of the pandemic on the economy. The government is committed to step up exploration of hydrocarbons in a big way to ensure India over time produce 50 per cent of its oil requirement to move towards self-reliance in energy.

The oil and gas exploration and production involved huge long-term investments and unfortunately, the industry is presently burdened with huge levies comprising 20 per cent central government cess and additional 20 per cent royalty that goes to states making this highly capital intensive and risky industry unviable.

In this low oil price regime, the industry has been united in forcefully demanding abolition of the cess and royalty to provide much needed relief during this challenging time. Though the royalty goes to states, the centre takes a call on its levy.

The industry has repeatedly represented to the Government in this regard.

There are already reports that both Petroleum Ministry and NITI Aayog have made a strong case for reduction in cess to give a boost to domestic oil industry. India imports 80 per cent of crude oil requirement, which results in outgo of up to $150 billion annually.  Prime Minister Narendra Modi’s vision is to reduce India’s dependence on imported oil by about 10 per cent by 2022.

One concern of Finance Ministry is that abolition of cess will result in loss of revenue of about Rs 15,000 crore to the exchequer. When fiscal deficit is mounting and revenue mop up is falling due to economic slowdown and pandemic, government is reluctant lose cess revenue at this juncture. The oil industry is of the view that the loss in revenue could be more than offset by levying 2 per cent customs duty on oil imports.

This will result in garnering Rs 25,000 to Rs 30,000 crore at current global crude oil prices. Also it will not have any significant impact on retail prices of diesel and petrol as it is already bench-marked to international prices. It will only remove protection provided to domestic oil refiners at the cost of more revenue to the government, according to the industry. Until recently, India had import duty on crude oil at 5 per cent, which was reduced to zero when oil prices shot up to beyond $75 a barrel some years ago. Crude oil prices have fallen sharply since then and now it is ranging between $40 and 50 a barrel.

Cess removal is necessary to fulfil Modi’s vision of stepping up domestic oil exploration and production in near term from existing producing blocks. Cess reduction will release more money to carry out oil exploration and development activities to enhance oil and gas production in the country.  It will provide level playing field across different contract regimes. Cess is not applicable to NELP, OALP and DSF blocks. Cess abolition will remove the disadvantage of Indian producers as compared to imported crude.

The government has come out with Rs 20 lakh crore comprehensive economic package to tide over the economic slowdown, but It has not come out with any relief package for oil and gas exploration and production sector. This is due to wrong perception that this sector is making huge profit.

In fact this business is highly risky and involved massive investment. Many a time, exploration drilling is unsuccessful. Only two out of ten wells drilled lead to discovery of oil and gas. This high failure rate adds up to cost and companies have spent over $30 billion without earning half of the investment. (IPA Service)

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