Review crude windfall tax, says the Oil Ministry

If the finance ministry approves the oil ministry’s proposal to exempt hydrocarbon blocks that were awarded to businesses via the production-sharing contract (PSC) and revenue-sharing contract (RSC) mechanisms from the windfall taxes on domestic crude, the state-run ONGC, and the private sector company Cairn are likely to gain.

The oil ministry reportedly argued that the one-time tax could be waived in such circumstances because these contracts, which have been awarded since the 1990s, have an internal mechanism by which high prices as incremental gains get transferred in the form of a higher profit share for the government.

Regarding these blocks, a royalty and cess are imposed, and the government receives a predetermined portion of the earnings. Over 300 blocks have had PSC contracts signed by the government so far, and about 100 RSC contracts. Cairn holds five PSC blocks and 62 RSC blocks, compared to ONGC’s 31 PSC blocks and 58 RSCs thus far under various contractual regimes. The Center levied special additional excise duties of Rs 23,250/tonne on crude oil and export taxes of Rs 6/litre, Rs 13/liter, and Rs 6/litre on gasoline, diesel, and ATF, respectively. The gasoline tax was subsequently eliminated.

The administration has since conducted five reviews of the new tax. The government reduced the windfall tax on domestic crude by 21% to Rs 10,500/tonne in the fifth review last week. Additionally, it reduced the special tax on diesel exports by 26% to Rs 10/liter and the tariff on shipments of jet fuel by an even steeper 44% to Rs 5/litre. The government increased the windfall taxes in the fourth review on August 31. Exports of diesel now incur a tax of Rs 13.5/liter, up from Rs 7. Similar to this, an additional fee of Rs 9/litre was added to ATF shipments, up from Rs 2.

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