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Firm on levying VAT
September, 12th 2009

Ruling down the centres assertion to levy central sales tax on Cairn crude, Rajasthan government is firm on charging VAT on crude oil sold from Cairn Indias fields. Rajasthan government principal secretary (Finance) C K Mathew told ET that state government is entitled to accrue 4% VAT on the oil.

Cairn India has entered into an agreement with the state government which clearly states that the point of sale would be in Rajasthan. The company buying the crude would have to pay 4% VAT to the state government. Even if delivery point is outside the state, it doesnt matter in this case as the sale is made within the territory of the state, he said in reaction to the letter written by Petroleum Secretary R S Pandey to Rajasthan Chief Secretary Kushal Singh saying: State sales tax/VAT would accrue to Rajasthan government in case the sale of crude oil is made for further processing within Rajasthan.

The government has nominated Indian Oil Corp (IOC), Hindustan Petroleum Corp (HPCL) and Mangalore Refinery and Petrochemicals (MRPL) for purchasing crude oil from Cairn Indias Rajasthan fields. Cairn is laying a pipeline to transport the crude from Barmer in Rajasthan to the Gujarat coast from where MRPL and HPCL will move the oil in ships.

The pipeline will connect to IOCs existing networks for taking it to Koyali and Panipat. The state government could have levied VAT on crude had it been sold within Rajasthan state, say to a refinery set up within its territory, Rajasthan Sales Tax/VAT as applicable on crude oil under the relevant State Act.

In this case the sale of crude oil takes place in Rajasthan state, but the crude oil has to be necessarily carried outside the state of Rajasthan for refining, the sale transaction will be deemed as having taken place in course of inter-state trade and would be subject to levy of CST, the letter said.

In another development, the petroleum ministry has asked Cairn India to pay a production tax on the oil it has started to produce from its prolific Rajasthan fields even though the contract does not clearly lay the onus of the levy on it. Cairn will have to pay the Rs-2,500 per ton oil cess in proportion to its 70 per cent interest in the Rajasthan fields while state-run Oil and Natural Gas Corp (ONGC) will pay for its 30 per cent stake, petroleum secretary R S Pandey said in Delhi.

Earlier, Cairn India had pointed out that the company will pay a royalty of Rs 8 crore per day at peak production. This is over and above the 50% profit petroleum that Centre will get from crude sales once production starts. Profit petroleum is the government's share of profit from an oilfield.

The company is expected to pump 1,75,000 barrels of oil from the three fields in Rajasthan at peak production. Though it will take two years for the company to reach peak production, the royalty even at initial production levels is expected to run into lakhs.

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