At a time, when Modi dispensation at the centre has pledged to take up administrative and judicial reforms in a big way, it is confronted with a legacy where actions of none other than Gujarat government may be becoming a stumbling block.
A case in point is latter’s decision to collect royalty of 20% on discount given by Oil and Natural Gas Corporation (ONGC) on sale of crude to downstream oil PSUs. The decision was upheld by Gujarat High Court (GHC) which on Nov 30, 2013 ordered ONGC to pay dues of around Rs 10,000 crore retrospectively from April, 2008.
ONGC challenged GHC order in Supreme Court (SC). On February 13, 2014, SC stayed GHC’s order but directed ONGC to pay royalty at pre-discount price from February.
The order threatens to strain finances of ONGC at a time when it is hard pressed for funds needed for investment in exploration and production of oil and gas to meet country’s energy needs. A few facts are in order to understand genesis of this contentious issue.
Until dawn of 21st century, petroleum products were covered under an administered price regime (APR). Downstream PSUs, viz. IOC, BPCL and HPCL were required to sell diesel, kerosene and LPG at prices below cost. Apart from this, till 1997-98, supplies of naphtha, fuel oil and low sulphur heavy stock (LSHS) to fertiliser industry were also made at ‘concessional’ price.
The losses on sale of these products were cross-subsidised by surpluses generated from sale of naphtha, fuel oil, LSHS, aviation turbine fuel (ATF) to other industries at prices much higher than costs. These inflows and outflows were administered through the Oil Pool Account (OPA). Depending on international price of crude versus price matrix of various products, OPA ran in to net surpluses or deficit at different points of time.
In 2002-03, based on recommendations of Vijay Kelkar Committee, the NDA government dismantled APR. Even as it continued the sale of diesel, kerosene and LPG at low prices, it bowed to the pressure of paying subsidies ‘directly’ from the Union budget.
The objective was to make these subsidies ‘transparent’ and ‘focused’. This was also a precursor to a phased program for progressive elimination in a time bound manner. But, this euphoria was short-lived.
The new government under UPA was never serious about reducing subsidies. Yet, it was keen on avoiding stress on the budget. Therefore, it came up with the ingenious idea of directing ONGC—besides Oil India Ltd (OIL)—to offer discount on supply of crude to downstream oil PSUs from October 30, 2003, a policy which continues till date.
According to the Oil Field Act (OFA), ONGC is required to pay a royalty @20% on the market value of the crude oil it extracts from oil blocks/fields to the state government.
Despite supplies at price net of discount, ONGC continued to pay royalty on pre-discount price till March 31, 2008 (excess amount paid during this period was Rs 3419 crores). However, from April 1, 2008 under instructions from central government, ONGC started paying royalty on price net of discount.
Gujarat government challenged this in GHC on September 27, 2011 (a delay of around 42 months is inexplicable) insisting that royalty be paid on pre-discount price which latter allowed and matter is now subjudice in SC.
Reportedly, Govt of India is veering round to let ONGC pay Rs 10,000 crores to Gujarat in lieu of freeing it from the obligation to share subsidy burden. This is patently unfair.
To expect ONGC to foot a portion of oil subsidy bill which is entirely center’s responsibility in the very first place was wrong. Already, during last decade, its resources have been encroached by a staggering Rs 216,000 crores. This has to stop any way.
Charging royalty on discount/subsidy too is illogical. A levy can be collected only on sale price. Subsidy is clearly not a part of sale realisation. Therefore, it cannot be subject to tax. Doing so will have astounding implications.
Consider market price of crude $106 per barrel. The sale price post-discount is $32 per barrel. If royalty of 20% is imposed on pre-discount price, this will work out to $21.2. The effective royalty rate would be 66% (21.2/32)! How can state charge royalty at a rate higher than prescribed under OFA?
Any levy inevitably increases cost of the product. This makes no sense as that is reimbursed as subsidy by union government. The action by Gujarat government has a precedent.
In 1988, Tamil Nadu, AP and Kerala raised demand for sales tax on subsidy received by fertiliser manufacturers under erstwhile retention price scheme (RPS) with a retrospective effect, e.g., from 1982-83 to 1987-88, in case of Tamil Nadu.
As in oil, union government controlled selling price of fertilizers, keeping it at a low level. The cost of production and distribution being higher, excess amount was reimbursed as subsidy. This was to compensate producers for loss they would have incurred due to low price.
Subsidy is not a part of realization from sale and therefore, imposition of sales tax is illogical. Indeed, high courts in AP, Kerala and Uttar Pradesh held that ‘demand for sales tax on subsidy was untenable’. Those judgements were upheld by Supreme Court.
Sales tax authorities in Gujarat too had raised demand for tax on subsidy. However, state government—through a circular issued under Gujarat Sales Tax Act (1969)—directed officials not to press for the same. While, other states corrected the wrong through judicial intervention, Gujarat did it on its own.
Why then, with regard to royalty on discount given on sale of crude—where underlying fundamentals are same—is state government in a reverse gear with High Court giving its stamp of approval?
This wrong must be corrected at the earliest and ONGC spared erosion in its internal resource base that has to be kept robust to enable support for its investment plans, which are essential for India’s energy security.