Oil and gas companies in the exploration and production (E&P) sector have sought a broad reduction in the tax levied on older oil blocks and exemption from customs duty on a larger set of imports in pre-Budget discussions. The upstream companies have said these are currently holding back domestic production and stifling capital expenditure, multiple sources in the industry said.
In recent meetings with the Finance and Petroleum Ministries, the industry has called for bringing the tax imposed under previous regimes such as the New Exploration Licensing Policy (NELP) and Pre-NELP on a par with the current Hydrocarbon Exploration and Licensing Policy (HELP) regime, they pointed out.
The NELP regime was brought in by the Centre in 1999 to replace the Nomination regime. It ran for nearly two decades till 2017 when the HELP regime came into force. The industry has asked the government to rationalise taxes from the current levels to 40 per cent, in line with global precedents. A key step towards this would be for the government to roll back the 20 per cent oil industry development (OID) cess that pre-NELP blocks attract.
“Oil and gas extracted from fields awarded under the Pre-NELP regime currently constitute 90 per cent of domestic production. These have an effective rate of taxation of 70 per cent. Comparatively, the incidence of tax is lower at around 55 per cent in the NELP and HELP regimes. As a result, companies are recovering their investments slower, and are being able to invest into new discoveries at a much slower rate than is required,” said a senior official at a private sector E&P company.
While it is variable, the imposition of the Special Additional Excise Duty (SAED) or windfall tax raises the tax burden by an additional 10 per cent. India’s E&P sector is currently dominated by the two government companies, Oil and Natural Gas Corporation and Oil India Limited which account for 71 per cent and 9 per cent of India’s total crude oil production. Cairn Oil & Gas, a part of the Vedanta group, and Reliance Petroleum, a subsidiary of RIL, are the two major private sector upstream companies.
“These issues have been raised earlier as well, but we are hopeful, considering that the government has pursued a series of reforms in the sector over the past few years. This includes, the government removing the need for revenue sharing Category 2 and Category 3 basins. Concessional royalty rates are also applicable if commercial production is commenced within a lesser timeframe,” another official said.
The industry has also called for expanding the list of custom duty exceptions, which had been pruned back in 2017.
Eyeing major expansion
India currently imports 87 per cent of its crude oil requirements. While the crude oil import bill shrank to $139.8 billion in FY24, down 13.3 per cent from the $161.4 billion in FY23, this was mostly due to the major discounts on Russian crude oil.
With an eye to progressively reducing import dependence, the government wants $100 billion investment in the E&P sector by 2030, especially in key offshore areas such as the Andaman Sea, However, it has struggled to attract interest.
The country has witnessed an aggregate of $2-3 billion of capital expenditure in the sector as opposed to the $15-20 billion that is required to hit the government’s targeted levels, industry insiders say.
Currently, an estimated 10 per cent of India’s 3.36 million square kilometre-wide sedimentary basin is under exploration, and the government plans to increase this to 16 per cent by the end of 2024. However, this is far below the government’s target of India’s exploration acreage to 1 million square kilometre by 2030. It has already reduced the ‘No- Go’ areas in India’s Exclusive Economic Zone by almost 99 per cent.
First Published: Jul 19 2024 | 9:14 PM IST
