ONGC agrees to a special oil tax

Keen to wriggle out of the stifling subsidy regime, upstream oil major ONGC has said it is ready to accept a special oil tax on any super-normal profits from high crude oil prices, if the subsidy-sharing regime is rationalised. It called for a specific model for equitable sharing of the ‘under-recoveries” with oil marketing companies (OMCs) also sharing significant burden and the CAG auditing the OMCs’ claims.

“A mechanism needs to be put in place wherein total under-recoveries are shared in equitable manner by all stakeholders, namely upstream oil companies, downstream oil companies, central and state governments,” ONGC said in a presentation to the Kirit Parikh committee on fuel subsidies.

The largest oil explorer’s comments are significant in the light of the government hinting at giving direct cash subsidy to OMCs, in place of oil bonds.

“Cash (provided for in the current year’s Budget) is an ideal manner of compensation for OMCs on which a decision has to be taken at the highest level,” finance secretary Ashok Chawla told reporters on Tuesday. Apparently, the government reckons that since the subsidy bill this fiscal is within manageable limits, it should try and eventually do away with the practice of issuing oil bonds.

Petroleum minister Murli Deora had on Monday demanded immediate issuance of oil bonds worth over Rs 20,870 crore to state-run firms to make up for the losses they incurred on fuel sales.

Now, ONGC and OIL together share a third of the total under-recoveries on LPG and PDS kerosene. The two companies had taken a Rs 32,000-crore hit on this account last fiscal.

ONGC said it cannot keep on contributing to reduce the under-recoveries of OMCs unless the subsidy burden-sharing regime is overhauled. The upstream major can still chip in under emergencies, like in cases of abnormally high international crude oil prices, provided the Comptroller & Auditor General of India (CAG) validated OMCs’ under-recovery claims.

Only a transparent subsidy regime would inspire confidence among various stakeholders, ONGC said.

A special oil tax (SOT) was first recommended by the BK Chaturvedi committee last year. ONGC said the proposal is acceptable to it, but suggested some modifications.

“While 100% rate has been recommended by the Chaturvedi panel, ONGC is of the opinion that that may not be advisable. However, SOT could trigger even at $60 per barrel, instead of $75 per barrel as recommended by the panel,” the PSU said in its presentation.

ONGC has suggested an SOT rate of 20% when international crude oil prices breach the $60 a barrel level, 40% on crossing $70 a barrel, 60% on reaching $80-90 range and 80% when prices go beyond $90 a barrel. The calibrated rate structure would help ONGC to retain a portion of price increase to cover its cost increases.

Besides, ONGC has also proposed that the central and state governments should clarify, through notifications, how tax liability for upstream companies would be computed based on post-discount price and not pre-discount price.

“It would be appreciated that along with an increase in crude price, the cost of inputs, that is, field services materials and equipment, expenditure on increased oil recovery (IOR) and enhanced oil recovery (EOR) schemes and expenditure on replacement/refurbishment/repairs and maintenance of ageing oil fields and facilities also increases,” the company said.

Quoting from a recent report from global investment advisory firm, Goldman Sachs, which said ONGC’s promoters have taken out cash of almost $20 billion from the company without consulting the minority shareholders, ONGC said, “This has also become a corporate governance issue since the board of directors is required to protect the interest of all shareholders, including minority shareholders.”

“Despite repeated objections raised by investors and more recently by independent directors on ONGC’s board, there has not been much headway,” the company said.

“This would take care of the concern of ONGC’s investors, especially FIIs who have been conveying that the existing mechanism of sharing of subsidies is not transparent and levy of additional tax by the government would be a preferable option,” the company argued.

ONGC also said the central government should consider taking on an increased share of the subsidy burden by reducing the excise duty on petroleum products while states can chip in by bringing down sales tax/ valued-added tax rates..

Source: Financial Express

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