Budgetary expectations

March 24, 2015 11:15 am0 commentsViews: 53

NewessaBy LK Gupta

Over the last few months, the entire global energy landscape has changed drastically and we are now in the cusp of an infl exion point, from where the jury is divided over how the coming months and years play out. While one school believes crude oil prices—down by over half from last year’s level have bottomed out and if it stays at this level or drifts lower, future supplies will be severely threatened as large scale investments are being pulled back. Another school believes that days of high oil prices are permanently over and the world is awash with alternate and non-conventional sources like shale and tight oil, hitherto unviable, which will always act as a balancing power anytime the prices threaten to rise un-naturally.

Whatever the outcome, India, which imports over 80% of its oil demand, is currently in a sweet spot and will likely see its oil import bill down by over half from last year’s level. This has provided a great opportunity to the government to put its fi nances in order by rationalising subsidies, without administering “bitter pills”. India’s oil and gas sector accounted for ~36% of India’s total import bill in FY14 (vs ~31% in FY 10) while it’s contribution to overall exports also recorded a comparatively lower growth to ~19% (Vs ~17% in FY10). India is the world’s fourth-largest energy consumer and oil consumption is estimated to reach four million barrels per day (MBPD) by FY16, expanding at a compound annual growth rate (CAGR) of 3.2 per cent during FY08-16. By 2025, India is expected to overtake Japan to become the third-largest consumer of oil. As per PPAC and Finance Ministry data, India’s oil and gas sector contributed Rs 3,05,350 crore in FY14, split almost equally to the central and state government as taxes and levies, making it one of the largest contributor to the exchequer. The sector contributed 15% to India’s total (direct + indirect) tax revenue and 22.5% to indirect taxes.

The government has already taken a bold step to completely deregulate the retail marketing of diesel, a process which began in January 2013 with the freeing of bulk diesel prices and raising retail diesel prices in small doses every month. Currently retail prices of petrol and diesel are market linked with consumers getting the benefi t of lower crude oil prices. Government has also announced the introduction of nationwide direct benefi t transfer (DBT) scheme for cooking gas, another bold step undertaken to rationalise subsidies.

Putting petro products under the ambit of GST would have been a major tax reform, but while they have been constitutionally brought under GST, they will not be subject to GST levy till notifi ed. Present state and centre taxes like sales tax/VAT, CST and excise duty will continue to be levied. We look to the government to reduce CST to 1% from 2%, in line with the proposed Constitutional Amendment bill on GST, before eventually making it zero with bringing the petro products under GST. Refiners bear this burden which is neither reimbursed by the customer not is recoverable or can be offset.

The industry wants the government to remove National Calamity Contingent Duty (NCCD) on crude oil levied at Rs 51.5 per metric ton, which was imposed on domestic and imported crude oil in the Union Budget 2003-04 for one year but continues to be levied till date, putting an additional burden on the oil refining companies. Alternatively, government may allow credit of NCCD for payment of excise duty/cess payable by oil companies on finished products. Refiners bear this tax even on exports of products using imported crude which should be exempted.

Natural gas is a key feedstock in the refinery operations and looking at the shortage of domestic gas, government should remove basic custom duty on imported NG. Currently the 5% custom duty refiners pay is not recoverable in price of petroleum products under the RTP mechanism.

While the excise duty on branded fuel has been narrowed significantly with respect to unbranded fuel since last year, there still exists about Rs 1 per litre tax difference in petrol and about Rs 2 per litre in diesel. It is a well known fact that premium fuel reduces consumption and enhances the life of the engine, thereby improving the overall efficiency, hence there is a need to bring this at par urgently to promote branded fuel.

In a country which imports over 80% of its crude oil requirements, the current policy, subjecting the services consumed by the exploration and production (E&P) entities to service tax, drains away a substantial part of the funds committed for exploration, thus reducing the funds available for actual exploration activities. Crude oil/natural gas produced by E&P entities are not liable to excise duties, hence they cannot take CENVAT credit of service tax incurred for exploration and production of crude oil/natural gas. It is recommended that the government formulate a scheme for refund of service tax paid by E&P companies on the services consumed for exploration as well as production purposes. In the alternative, services provided to E&P companies which are essential for petroleum operations may be “Zero rated”, so that there is no stranding of taxes at the hands of service providers.

In order to encourage self reliance in energy, government should extend the 80 IB tax benefit to all producing oil and natural gas blocks and not just those assigned under NELP-VIII and CBM round IV.

essar_MDThe author is MD
and CEO, Essar Oil.

Expectations

  • Putting petro products under the ambit of GST would have been a major tax reform. Government should reduce CST to 1% from 2%, in line with the proposed Constitutional Amendment bill on GST, before eventually making it zero with bringing the petro products under GST. Refiners bear this burden which is neither reimbursed by the customer not is recoverable or can be offset.
  • The industry wants the government to remove the National Calamity Contingent Duty (NCCD) on crude oil levied at Rs 51.5 per metric ton, which was imposed on domestic and imported crude oil in the Union Budget 2003-04 for one year but continues to be levied till date, putting an additional burden on oil refining companies. Alternatively, the government may allow credit of NCCD for payment of excise duty/cess payable by oil companies on finished products. Refiners bear this tax even on exports of products using imported crude which should be exempted.
  • Natural gas is a key feedstock in the refinery operations and looking at the shortage of domestic gas, government should remove basic custom duty on imported NG. Currently the 5% custom duty refiners pay is not recoverable in price of petroleum products under the RTP mechanism.
  • Subjecting the services consumed by the E&P entities to service tax drains away a substantial part of funds. Crude oil/natural gas produced are not liable to excise duties, hence companies cannot take CENVAT credit of service tax incurred for exploration and production. Government could formulate a scheme for refund of service tax paid by E&P companies or services provided to E&P companies may be “Zero rated”, so that there is no stranding of taxes at the hands of service providers.
  • To encourage self-reliance in energy, government should extend the 80 IB tax benefit to all producing oil and natural gas blocks and not just those assigned under NELP-VIII and CBM round IV.
  • While the excise duty on branded fuel has been narrowed significantly with respect to unbranded fuel since last year, there still exists about Rs 1 per litre tax difference in petrol and about Rs 2 per litre in diesel. Premium fuel reduces consumption and enhances the life of the engine, hence there is a need to bring this at par urgently to promote branded fuel.

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