Government to convert cess on domestically produced crude oil into ad valorem rate

The government is likely to convert a cess on domestically produced crude oil into an ad valorem rate from a fixed per tonne levy at present. The budget for 2016-17 is likely to make changes in the way the oil industry development cess is levied. The ad valorem rate of cess will result in higher payouts when prices are high and lower when rates fall. Currently, state-owned Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) pay a cess of Rs 4,500 per tonne on the crude they produce from their allotted fields on nomination basis. Cairn has to pay the same cess for oil from the Rajasthan block. Given that oil prices have dropped to an 11-year low of under $35 per barrel, the cess translates into one-third of the realisation in just one levy. The budget may instead fix the levy at 8-9 per cent of the crude oil price.