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Govt asks to pay production tax
September, 12th 2009

Will have to pay Rs 2,500 per tonne oil cess in proportion to its 70% interest in Rajasthan fields.

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 tonne oil cess in proportion to its 70 per cent interest in the Rajasthan fields, while state-run Oil and Natural Gas Corporation (ONGC) will pay for its 30 per cent stake, Oil Secretary R S Pandey said today.

In our view and according to legal opinion we have obtained, cess is to be paid by Cairn and ONGC. Cairn has protested (as its liability on cess is not defined in the Production Sharing Contract) but we have told them to pay, so they are paying (under protest), he said.

Pandey said Cairn was likely to challenge the levy of Oil Industry Development Act (OIDA) cess. They will contest it at appropriate forums. If there is any legal remedy, they can try their luck.

The government had in all pre-National Exploration Licensing Policy (Nelp) blocks, like Rajasthan, that were awarded to foreign firms, clearly stated that the contractor would not bear any cess and royalty on oil and gas. This liability was vested on the licensee, which in the Rajasthan block case is ONGC.

The PSC for Rajasthan block clearly makes ONGC liable to pay royalty but there is no specific mention of OIDA cess, which in similar PSCs of that era was also the responsibility of ONGC.

When contacted, a Cairn India spokesperson said, We will always honour our obligations under the PSC. If, however, there are any disputes we would discuss them with the government and other stakeholders and seek to secure an amicable resolution.

Any statutory obligation to pay OIDA CESS that might be held to be applicable as a matter of Indian law does not apply to production from the Rajasthan Block because while the Rajasthan Block PSC details various specific and general obligations in the nature of taxation, there is no specific mention of OIDA cess, a source said. The company had earlier disputed the governments demand for the OIDA cess. At the time of launching its initial public offer (IPO), Cairn had also pointed at the risk to potential investors.

Cairn has commenced crude production from the Mangala field in the Rajasthan block on August 29. Output initially was a few thousand barrels per day and will be slowly ramped up to 30,000 bpd. The production from the Rajasthan Block is expected to be ramped up to 125,000 bpd by H1 2010 and 175,000 bpd by H1 2011.

The government has nominated MRPL, IOC and HPCL for the offtake of initial crude quantities from the Rajasthan Block for the period 2009-10 and 2010-11.

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