OID cess, service tax hike add to woes of oil cos

Written by Neha Pal | Neha Pal | Updated: Mar 17 2012, 08:43am hrs
RS Sharma

The revenue of ONGC, the largest oil producer in the county, will get negatively impacted by R5,400 crore on account of the Oil Industry Development (OID) cess and the increase in service tax. This Budget has belied the hopes of the oil and gas industry.

Breaking up the loss for ONGC, the OID cess means a hit of R5,000 crore every annum, while the increase in service tax adds another R300 crore.

The increase in OID cess from R2,500 to R4,500 per tonne has increased the financial burden on the existing producers of oil substantially.

The service tax is levied on the revenue generating services whereas oil exploration is not a revenue generating activity, and so there is a strong case of exemption of the oil and gas exploration from the ambit of service tax.

Against the underrecoveries at R1, 40,000 crore, the government has only been able to give R45,000 crore. This is a big setback for companies like IOC, HPCL, BPCL, ONGC, GAIL and Oil India, and the pain will continue as they'll have to bear the burden in the future as well.

The issue of energy security is of extreme significance because it is the prime mover of the economy and in case economy is intended to grow on a sustained basis, it is essential to take into account energy security.

Coal, along with hydrocarbons, adds up to 94% of the energy basket and there was a need for some strong reforms to ensure energy security for the future.

Indias dependence on import of oil and gas is increasing alarmingly. In the mid-80s, we were self-sufficient to the extent of almost 70%, but today our the figure is at 25%.

Oil and gas exploration is highly capital intensive and a high-risk activity. It is essential that there are adequate incentives for these high-risk investments. While the sector has been asking for the same for a long time, the Budget was silent on this.

Together, oil and gas contribute 40-45% of the energy basket, making a case for an urgent need for some effective steps to reduce our import dependence.

This can be done by increasing domestic production capacities, and for doing that it is necessary to incentivise investments for exploration within the country. As of today, only 20% of our sedimentary basins are fully explored.

The Economic Survey 2012-13 has mentioned that the government will give a fixed amount of diesel subsidy.

Instead, the government should follow a calibrated mechanism that should be in tune with the volatility in the crude oil and petroleum product prices.