Taxman slaps service tax notices on ONGC, other firms

Many oil companies, including state-run ONGC, have received notices from the tax department to pay service tax on cash calls paid to consortium partners as well as on cost petroleum and royalty paid to the government. According to an industry source, tax notices adding up to $1 billion have been served on these companies over the last few months. An ONGC executive, requesting anonymity, confirmed to FE that the company has received a service tax demand of Rs 2,000 crore.

The Central Board of Excise and Customs (CBEC) had last year clarified that licences granted by the government to firms to exploit the country’s natural resources is a taxable service and should come under the net.

The companies have been in talks with the ministry of petroleum and natural gas, arguing that the profitability has eroded over the years due to falling oil and gas prices and such a move would further affect their financials.

According to the source quoted above, the petroleum ministry had assured that such service taxes will not be applied but “seems the tax officials are not in the loop as the ministry has given approval”. The source added that a demand to correct the move in the budget has been made by the industry.

A service tax on cash call — the share of investment a consortium partner under the production-sharing contract gives to the operator-investor — analysts said, amounted to discouraging such mutually convenient alliances.

And levying service tax on royalty paid to the government is tantamount to double taxation, they added. They also wondered how cost petroleum, part of expenses incurred by explorers, could be subjected to service tax.

“There are various other taxes already in place and an ad valorem cess of 20% is levied on crude oil lower realisations. This move will take away a lot from the companies and the financial impact will be huge,” said an analyst from a rating agency, asking not to be named.

In the Union Budget of last year, finance minister Arun Jaitley had announced a levy of a 20% cess instead of the earlier fixed rate of Rs 4,500 per tonne. Another ONGC executive, who also did not want to be named, said the company has demanded the cess rate to be fixed at 10%. From a high of $115 per barrel, crude oil prices went down $28 in the last few years and is around $53 per barrel now. CBEC in its notice had said that since service tax is applicable on wireless spectrum, which is a natural resource, oil and gas should also come under the net.

Experts, however, disagree with the view and say the move is regressive. “Spectrum is licensed out for usage but oil and gas are not as they are marketed. Such moves affect the sanctity of a contract and that does not go down well with investors,” said an industry expert, seeking anonymity. The expert added such steps will deter international investors and the country needs huge investments in technology and infrastructure when it comes to exploration.

CBEC has also stated that one-time payments on natural resources are exempt from service tax but periodic payments are not and the oil companies will have to pay monthly.