Budget 2013: What the oil and gas sector expects

February 21, 2013

(Any opinions expressed here are those of the author and not of Reuters)

India’s oil and gas sector, often regarded as the country’s growth engine, has grown by leaps and bounds over the past decade, but the quest to reach the top of global league remains a challenge because of rising under-recoveries and lack of policy incentives.

The sector is a key revenue earner for the central and state governments. In 2011/12, it contributed 2,327.69 billion rupees to central and state governments in taxes, accounting for 20.6 percent of total indirect taxes.

At a time when the government earns a chunk of its revenue from the oil sector, the finance minister should consider including in Budget 2013 proposals to lower or exempt the sector from various taxes.

The recent announcement of a partial deregulation of diesel prices, with market-linked price for bulk users and graded increase in retail prices till price parity, is a welcome move. However, the need of the hour is complete deregulation of fuel prices and allowing market forces to set the benchmark in tandem with global oil prices.

Once price parity is reached between retail and market prices, it will not only benefit consumers by offering them a choice, but also help in managing diesel demand and mitigate the substitution of various products of industrial consumption such as fuel oil and naphtha with diesel.

It will also be good for the economy, since a ballooning subsidy bill was threatening to derail overall fiscal discipline.

Private oil marketing companies have invested substantially in setting up retail outlets, but due to lack of a level playing field, these assets are underutilised. The private sector operates about 2,000 outlets mostly in highways and rural India, providing direct employment to between 15,000 and 20,000 people. A level playing field for the private sector would help invigorate the local economy.

The industry wants the government to remove the National Calamity Contingent duty (NCCD) on crude oil levied at 50 rupees per metric ton, which was imposed on domestic and imported crude oil in the 2003/04 budget. The levy was to provide support to relief work in areas affected by natural calamities and was supposed to have been removed the following financial year. It has put an additional burden on oil refining companies.

The industry has been asking for a waiver on customs duty on import of materials such as pipes, valves, flanges and data communication systems used by oil companies for laying gas pipelines and petroleum products.

A reduction in excise duty on branded high speed diesel (HSD) and motor spirit (MS) products has been sought in line with unbranded HSD/MS. Marketing of premium branded products, which help save energy and prolong the vehicle’s life, has virtually come to a standstill, something that is not in the interest of a nation which imports nearly 80 percent of its oil requirements.

The current policy, subjecting the services consumed by E&P entities to service tax, drains a substantial part of the funds committed for exploration, reducing funds available for actual exploration activities.

Crude oil/natural gas produced by E&P entities is not subject to excise duties. Hence, they cannot take CENVAT credit of service tax incurred for exploration and production of crude oil/natural gas. The government should come up with a scheme for refund of service tax paid by E&P entities on services consumed for exploration as well as production purposes. Or not charge any tax on services provided to E&P entries.

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