Oil drilling cos want crude oil, natural gas under GST

POL is heavily taxed both by Central and State Governments, and the tax incidence can be reduced through cut in excise and customs duties, besides bringing them under GST.

Current status

Crude oil prices are on boil. The Indian basket of oil prices for January was $93.87 per barrel up from $89.78 per barrel in December 2010, $84.26 per barrel in November 2010, $81.11 per barrel in October 2010 and $76.09 per barrel in September 2009.

Crude oil prices have risen due to significant increase in demand for crude oil with recovery in world wide economic scenario and expected fall in supply due to political disturbances in Middle East. India still imports a significant 80% of the total crude oil consumption.

Duty structure

Crude oil as well as Natural gas produced under NELP contracts is not liable to duties of Excise under the Central Excise Act, 1944. However Rs 2500 per tonne is being charged as cess and Rs 50 per tonne as National calamity contingent duty (NCCD). Regards Custom duty it was made 5% from nil. It attracts Rs 50 per tonne as NCCD.

Industry Expectation

• Reduction of basic custom duty from 5% to 0% on crude oil

• Refund of service tax paid by E&P companies on the services consumed for exploration as well as production process.

• Clarification regarding the tax treatment of Farm in Costs.

• The definition of mineral oil should be changed u/s 80 IB (9) to include natural gas to grant tax holiday to commercial production of natural gas with retrospective effect from 1st Aril, 2007.

• MS, HSD ATF, Crude oil and Natural gas should not be excluded from
  GST.

• The industry expects necessary amendments may be made in CENVAT Credit Rules, 2004 to facilitate deemed service provider to avail CENVAT credit of tax/ duty paid on input/ input service in India by Foreign Service provider in relation to execution of work and utilize for payment of service tax on output service. Deemed service provider is the Indian company who has received the service provided by Foreign Service provider and is also liable to pay taxes.

Analysts/market expectations

We expect reduction in custom duty on crude oil from 5% to nil and corresponding reduction in petroleum products, say from 7.5% to 2.5%. Also, some concessions on service tax may be given to the oil & exploration companies

Stock to watch

ONGC, RIL, Cairn India, Oil India

Outlook

Crude oil production is expected to rise by 10% in FY'11 which had stagnated around 33 MMT mainly due to incremental crude oil production from Barmer field in Rajasthan by Cairn India. To further intensify efforts of exploration of hydrocarbon in the country, as many as 31 exploration blocks were awarded under the 8th round of New Exploration Licensing Policy (NELP-VIII).

Buoyed by the success of NELP rounds with 87 discoveries so far, Government has further offered 34 blocks under NELP-IX. Oil companies are also trying to increase their presence internationally. Any benefits given to the sector can attract more players and facilitate find more oil and gas and ultimately help contain the pace of increase in POL (including Crude Oil) imports.

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