There is a built-in mechanism in contracts to get windfall gains; Firms themselves may have to pay more than windfall profits as a result of the additional tax.
There is a built-in mechanism in contracts to get windfall gains; Firms themselves may have to pay more than windfall profits as a result of the additional tax.
The oil ministry has sought a review of the two-and-a-half-month-old windfall tax on domestically produced crude, saying it is against the principle of fiscal stability provided for in contracts for exploration and production.
The ministry, reviewed by PTI in an August 12 letter, sought exemptions for areas or blocks – which were bid from new levies – to companies under production sharing contracts (PSCs) and revenue sharing contracts (RSCs).
It said that from the 1990s, companies were given blocks or areas for exploration and production of oil and natural gas under various contractual arrangements, in which a royalty and cess are levied and a pre-determined return of profits to the government. get percentage.
According to the letter, the ministry was of the opinion that there is an inherent mechanism to factor in higher prices in contracts as the incremental benefits get transferred to the government in the form of higher profit share.
Emails sent to the oil ministry as well as the finance ministry for comments remained unanswered.
India imposed windfall profit tax for the first time on July 1, joining a growing number of countries that tax super-normal profits of energy companies. While duty was imposed on the export of petrol, diesel and jet fuel (ATF), a special additional excise duty (SAED) was levied on locally produced crude.
The SAED on domestic crude was initially ₹23,250 per tonne ($40 per barrel) and was reduced to ₹10,500 per tonne in fortnightly revisions.
The government levies a royalty of 10-20% on the price of oil and gas as well as an oil cess of 20% on production from fields granted to state-owned Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL). an enrollment basis.
Apart from these levies, areas were awarded under the PSC regime where the government gets around 50-60% of the profit made after deducting the cost. There is a clause in RSC Governance especially to get windfall benefits for the government.
As per the calculations of the Oil Ministry, the letter said, the new levy in case of PSC and RSC results in a situation where the operator pays himself much more than the windfall profit.
In addition, contracts specifically provide financial stability for the contracting parties, it said, adding any change in law or rule or regulation prejudicially affects the expected economic benefit to the parties, thereby altering the terms of the contracts. Modifications and adjustments may be sought.
The ministry said requests for such amendments or amendments to contracts have already been received.
The Oil Ministry was of the view that there is an urgent need for aggressive investment in domestic oil and gas exploration.
The ministry said in the letter that given that the PSC and RSC contracts already have in-built mechanisms for sharing revenue with the government in the high value regime, the government has to provide a new levy to all the blocks falling under such contract regime. exemption should be considered.
It said it had already received representations from major crude oil producers including state-owned ONGC and OIL and private sector Vedanta Ltd for review of the new levy as it was adversely affecting their investment plans.
It added that the concerns raised by these firms include economic instability and breach of contract clause.