Budget wish-list: Oil producers seek tax sops to raise domestic output

The exemption was available to the sector from March, 2012 till the introduction of GST on June 30, 2017.

The players want restoration of exemptions from excise duties (basic excise duty, special excise duty and additional duty, which now cumulatively stands at Rs 21.8/litre) on the diesel procured for hydrocarbon explorations and production activities.
The players want restoration of exemptions from excise duties (basic excise duty, special excise duty and additional duty, which now cumulatively stands at Rs 21.8/litre) on the diesel procured for hydrocarbon explorations and production activities.

Domestic hydrocarbon producers have sought various tax sops and the restoration of some duty exemptions in their budget wish-list, even as the government has expressed concerns over the stagnant output.

The Association of oil and gas operators (AOGO) which include state-run Oil and Natural Gas Corporation, Oil India and major private producers such as Cairn India, Reliance Industries, BP and Shell India’s subsidiary BG Exploration and Production also sought the restoration of the ‘investment allowance’ system, which made tax incentives available on capital expenditure made on plants and machineries in the past. The system was discontinued since FY18.

The players want restoration of exemptions from excise duties (basic excise duty, special excise duty and additional duty, which now cumulatively stands at Rs 21.8/litre) on the diesel procured for hydrocarbon explorations and production activities. The exemption was available to the sector from March, 2012 till the introduction of GST on June 30, 2017.

According to AOGO’s letter to the Union finance ministry, reviewed by FE, the industry also wants the government to reduce the incidence of the oil industry development (OID) cess, which has been attributed as one of the reasons for the under-development of the small and marginal oil fields. The 20% OID cess is being levied on the prices of crude oil produced from nominated blocks and fields allocated before the new exploration and licensing policy regime which came in place in FY98. The abolition of the 20% royalty payable to states has also been sought.

Further, the industry wants the benefit of 15% corporate tax rate, offered to new mining and manufacturing companies from April, 2020, to be extended to oil and gas producers as well. Looking to cut costs for implementing enhanced oil recovery (EOR) technologies to extract oil from ageing fields, AOGO has requested the government to provide monetary benefits for such investments. The cost of production increases for mature and ageing fields, warranting the deployment of new technologies which raises capital intensity of the projects.

Pointing out that domestic cost of crude oil production is around $25-30 per barrel, while imports are being done at around $70-$80 per barrel, Prachur Sah, CEO of Cairn Oil and Gas had earlier told FE that “it makes all sense to invest in production even if output cost rises to $40 per barrel”. For Cairn’s blocks, as much 70% of the revenue generation goes as levies to different governments, while the cost of running the operations take up about 20-25%, making it more difficult for the company to invest in the capital intensive technologies.

Indigenous crude oil production caters to about only 15% of the country’s requirements, while about 50% natural gas has to be imported. The production is stagnating.

The government recently said that it wants domestic production of oil and gas to “increase exponentially” and “for this private sector companies can be involved as partners or through various business models so that new techniques and technology can be brought in through such companies which have experience in this”. In this regard, Prime Minister Narendra Modi recently interacted with the heads of major global oil companies, including Rosneft’s Igor Sechin, Saudi Aramco’s Amin Nasser, BP’s Bernard Looney, RIL chairman Mukesh Ambani, and Vedanta chairman Anil Agarwal.

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