Budget 2023: Cravings For A Comprehensive Petroleum Taxation Policy

The Ukraine crisis is a moment of introspection for India. By standing up to international pressure, the Indian diplomats have indeed done yeoman service to the nation by ensuring that the energy requirements of the citizens are addressed in the most optimal terms.

However, it also highlights the critical dependence of the nation on imported oil, the ever-fluctuating prices of which significantly consume the precarious financial resources. Given India’s rising energy consumption, the imminent 2023 Budget is a good opportunity to introduce provisions towards ensuring the country’s self-sufficiency for oil and gas resources.

Economics reveals the correlation between high oil import dependency, currently at 85.7%, and its impact on India. Increase in international crude oil prices not only puts pressure of India’s Balance of Payment position, but also widens the Current Account Deficit, which in turn strains the government’s financial resources.

Furthermore, high oil prices result in domestic inflation, adversely impacting the citizens and the economy. In other words, national interests are best served by reducing dependence on imported oil, and instead, by having a serious focus on augmenting domestic hydrocarbon production.

It is not just a question of financing the economic consequences of the arbitrage between domestic oil production and its import. A much larger issue is at play—national energy security. The government is cognizant to the criticality of domestic oil production, for the expansion of which a comprehensive Hydrocarbon Exploration and Licensing Policy was announced in March 2016, which is a significant departure from previous fiscal regimes.

However, exploration under the more progressive regime will start delivering results in the time to come. Over 90% of the current production comes from pre-NELP and nominated acreage, which are mature and ageing fields.

Earlier this year, the government introduced a new ‘windfall levy’, which steeply dilutes propensity for further investment in this capital-intensive industry.

Its fortnightly review mechanism, purportedly to recalibrate the rates of the levy with the oil price changes, does not seem to have clarity as to how the adjustment is being computed, as it is not arrived at in a manner commensurate with the reduction in the level of the oil prices. This raises uncertainties on the substance of the policy assurance.

Even though touted as an ad-hoc measure, the levy leaves one to wonder if a long-term vision on petroleum taxation exists, which is crucial in view of long gestation-period in this industry. The levy counters the policy narrative that the overriding emphasis is on maximising oil production and not maximising revenue. This is besides another key aspect, which is the imposition of this levy as an excise duty, and not as a tax on profits (which is the situation with the U.K., the only other country dabbling with such levy, and which also provides for an investment allowance as well as a sunset clause).

India’s oil and gas sector is saddled by one of the most arduous tax regimes in comparison with other countries, with the sector being dominated by indirect taxes. Economists are at pains to illustrate how indirect taxes are inherently regressive as they are delinked with the ‘ability to pay’ principle.

Despite five years of GST, petroleum products such as crude oil and natural gas have still been kept outside its ambit, while procurement of key goods and services as inputs is under the GST, due to which oil and gas producers are unable to cross-utilise tax credits. This runs contrary to the premise of the GST, which was to eliminate tax cascading.

Subsuming the entire value chain of the oil and gas sector within GST will unlock significant value for businesses by substantially reducing the cost of production. In fact, it is not just the industry but also the Petroleum Ministry which has unequivocally endorsed the overwhelming priority to subsume petroleum products within GST. While the Ministry of Finance was also in alignment with this proposition, there was a lack of consensus with state governments, and this stalemate is yet to be resolved.

Another reason to push for a revisit to taxation of the oil and gas sector is the fact that the petroleum industry is still governed by archaic tax rules. To illustrate, cess is levied on crude oil produced in India under the Oil Industries (Development) Act of 1974. It was envisaged that the cess will augment the financial resources of the Oil Industry Development Board, which would work towards development of the industry.

However, closer examination reveals that hardly any funds (out of the cess proceeds) have actually been assigned to the Board. Domestic producers are rendered at a disadvantage vis-à-vis imported crude oil, which does not attract tax. This is clearly counterintuitive to an Aatmanirbhar Bharat and the Hon’ble Prime Minister’s vision of reducing import dependence for crude oil.

Given that February 2023 would be the last comprehensive budget of the incumbent government, it is crucial that the exercise for instituting long term reform—which would unleash domestic production by encouraging further investment—is addressed on priority.

Not just a financial reform, it would also arrest the need for continuous overseas political engagement for this crucial commodity, thereby saving diplomatic capital for larger interests.

Tarun Jain is an independent advocate practicing taxation laws. 

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.