Re-examine oil cess, says study

Report commissioned by petroleum ministry.

A study commissioned by the petroleum ministry has recommended a re-examination of the oil cess, called for a special tax regime for marginal and aged oil fields and mooted the idea of lowering sales tax on downstream petroleum products.

The study, undertaken by the National Institute of Public Finance and Policy, has said that while the cess at present amounts to a specific rate of Rs 1,800 per metric tonne, royalties are levied at different ad valorem rates.

As a major element of overall tax build-up, the rate of cess by implication needs to be re-examined, the report states. Cess revenues have not shown any buoyancy despite rising oil prices, as it is a specific rate tax.

In fact, the Rangarajan Committee on pricing and taxation of products had recommended a substantial rise in the rate of the cess to Rs 4,800 per metric tonne.

While the reasoning for raising the cess has not been faulted by the study, the rise in the rate could have economic effects that may have not been considered, the study adds.

The Centre has not benefited as the cess does not respond to price increases, but it has gained substantially through increasing excise revenues from downstream products. At the same time, its subsidy burden has increased.

Accordingly, the study suggests that state governments do their bit to reduce the burden on their citizens. While sales tax on crude cannot exceed 4 per cent, the rates on downstream petroleum products are in general quite high.

Suggesting that the empowered committee of state finance ministers can consider the issue, the study adds that this will be called for in any case to reduce the dependence of states' revenues on a single group of products, as well as in the interest of fiscal harmonisation.

The study adds that sales taxation of natural gas is very different from that of petroleum crude. While the latter is a declared good under Section 14 of the Central Sales Tax Act and cannot be taxed at more than 4 per cent, natural gas and LNG are taxed at substantially higher rates (between 8 and 20 per cent). Thus, the study has called for a lower tax on natural gas.