Legal hitch keeps small field oil operators liable for windfall tax

Entities whose FY22 crude oil output was less than 2 mn barrels exempted from windfall tax already

The operators of discovered small fields (DSF) have argued for immediate clarity on windfall tax norms and sought exemption from the tax based on an entity’s annual oil production share and not on the basis of annual oil output at the block level.

Despite the government clarifying that windfall tax would not be levied on small oil field operators, they have remained liable for paying it due to challenges in legally reading the notification.

Crude oil prices have witnessed extreme volatility in 2022, resulting in very high prices for end consumers at petrol pumps. Countries around the world have implemented various measures to mitigate the adverse impacts on consumers. Issued on June 30, the “windfall tax” or Special Additional Excise Duty (SAED) on domestically produced petroleum crude has been cited by the government as a key measure.

It has subsequently exempted “persons” whose annual production during the preceding financial year of FY22 was less than 2 million barrels from the tax. But the move has changed little on the ground.

The Association of Discovered Small Field Operators (ADSFO) has now raised the matter with the Central Bureau of Indirect Taxes and Customs (CBIC) in a recent letter reviewed by Business Standard.

“The exemption notification does not provide any clarity with respect to the definition of ‘person’, which has led to an ambiguity as to whether conditional exemption is applicable on the annual production of Petroleum crude at the block level, or as per the annual production share of each legal entity engaged in the business of production of Petroleum crude,” the ADSFO has pointed out.

In view of this, ADSFO has requested CBIC to issue a clarification to provide that the annual production limit for seeking benefit shall be computed at the legal entity level and not at the block level.

Slow start
 

Earlier, the association had argued that since most small operators were yet to produce oil and gas from their fields, the finance ministry should issue a clarification that all production should be exempt from cess in the current year. First production is expected to start in FY23.

The contracts for these bids were finally awarded in February 2017. Three years on, many of them have started production. Most of these investments are waiting for clearances from the environment, forests, and wildlife departments, approvals that had been assured when contracts were signed.

Meanwhile, 26 companies have submitted 106 bids in the third round of DSF auctions for which the last date of submission of bids was May 31. The list of companies includes Oil and Natural Gas Corporation (ONGC), Oil India (OIL), and Anil Agarwal-led Vedanta, among others.

About 70 per cent of the price of each barrel of oil produced domestically is paid to the exchequer by way of loyalty and contractual share of revenue or profit and taxes, including cess.

The extent of applicability, reference period, and amount of cess or tax or duty of windfall tax are reviewed fortnightly. The latest review saw the tax on domestically produced crude oil being raised from October 16 onwards to Rs 11,000 per tonne, up from Rs 8,000 per tonne. The tax on the export of aviation turbine fuel was hiked to Rs 3.50 per litre from nil earlier.

Big hurdle for small fields

• Launched on June 30, windfall tax is reviewed fortnightly
• Operators of discovered small fields (DSF) say the tax is huge financial burden
• Many DSF operators are yet to begin operation
• 26 companies have bid in Round III of DSF auctions