Budget 2016: FM Arun Jaitley announces 20% cess on domestic crude oil

MUMBAI: India will now levy a cess at the rate of 20% on domestically produced crude oil, calculated ad valorem, as against the present rate of Rs 4,500 per tonne providing a big relief to explorers like ONGC and Cairn India.

Industry has been lobbying to link the cess on oil to an ad valorem rate and was expecting it to be in the range of 8-10%. At the current Rs 4,500 per tonne rate, it accounted for over 20% of crude oil prices, thereby hurting the energy companies.

In the Union Budget 2016 proposals, the government said, “Clause 222 seeks to amend the Schedule to the Oil Industry (Development) Act, 1974 so as to levy cess at the rate of twenty per cent. ad valorem instead of the present rate of Rs 4,500 per tonne, on domestically produced crude oil.”

The Oil Industry (Development) Act, 1974, provides for cess collection as a duty of excise on domestic crude oil. Cess incurred by producers is cannot be recovered from refineries and therefore forms part of cost of production of crude oil.

This is in line with the oil ministry’s statements in the past that it was in agreement with the industry that the cess on crude oil should be linked to a formula as against the fix rate now which is hurting as the crude prices have plummeted.

ONGC, the biggest operator of the producing blocks, and other energy majors had written to the oil ministry, seeking a change to ad valorem cess, or tax based on price of the product. Currently, the output cess is fixed at Rs 4,500 per metric tonne, which appears a big burden oil prices have fallen more than 60% since June last year.