Govt may levy additional cess: Subir Raha 2008-07-09 11

ubir Raha Ex Chairman of ONGC said that the Ministry of Finance is the biggest beneficiary of windfall gains due to the high oil prices. He feels that the government could levy an additional cess. He said that the cess on ONGC is a specific tax, which is currently at Rs 2,500 per tonne.
The windfall tax should act as a stabilisation fund for subsidies, Raha said. He also feels that the government has taken steps that allegedly violate NELP agreements

Raha said there was no provision of profit sharing under any non-NELP (new exploration licensing policy) regimes. The NELP regime has profit, petroleum and production sharing agreements.
Excerpts from CNBC-TV18’s exclusive interview Subir Raha

Q: Do you think it may happen after all, because there is some talk or demand from certain political parties about this? Do you think there is a possibility that such a thing might actually be pushed through?
A: It would be difficult to predict what the government would do, especially when the basic structure of the government is likely to change in the next week or so. So one can’t predict that. Windfall gains by definition; is profit that comes from unfrozen situations.

Say the budget for buying crude is at USD 80/bbl and crude actually goes at USD 120/bbl, the producer would make much more money than what he budgeted, that would be a windfall gain situation. If we take that issue then it’s not only the crude producers but even the finance ministry has been the biggest beneficiary of this windfall gain out of the recent rise of crude prices over the last 2-3 years. If someone is making an incremental profit or super profits under the existing policy of the government. I don’t think you can call that, a windfall gain. Export oriented unit is the clear policy by the government of India to export. Whether the government wants to encourage leather goods exports or petroleum exports is for the government to decide. So there is an essential difference on what a windfall gain is and what an incremental profitability is by using an existing policy of the government.

Q: So you are saying that by the way of law or policy, it is not possible that the windfall tax goes through and just explain the benefit of the viewers. What is the current profitability and production ratio sharing between the government and the private companies because even that seems quite well in favour of the government?
A: On production sharing, there are a number of different regimes in India. The contracts that were signed in the 80s and 90s were different kind of contracts, where the government gave equity in certain oil and gas fields. The exploration blocks or production blocks are on a one time signature bonus payment.
This is quite different from the NELP regime. The contracts were signed before the NELP. For each round of those contracts, the regimes were different. In none of these contracts was there a provision for profit sharing with the government except for corporate income tax. The license holders pay royalty and cess.

Q: Have you given some thought to how this will actually be made to work in practical terms if they decide in a principal that they want to levy some kind of a cess on the private companies? Do you think it will be an ad hoc number? Would it be a percentage of the losses of oil companies, which will be put on these private companies? Have you worked on what the possible formula for extracting that cess if indeed they were to implement it would be?
A: There would be many voices of scaling the cat. The cess, which is not levied on ONGC, is a specific tax that has gone up over the years from Rs 300 to Rs 2,500 per ton. The private producers today, under the earlier rouse actually, had made a one-time payment to the government and they don’t make any further payments. So the profit literally goes to them and those contracts are not as water tight as the NELP contracts are.

What we have seen is that the government has actually taken steps, which allegedly violates the sanctity of the NELP contracts itself. So there should be no issue of the government deciding to put a cess whether by way of incremental income tax or any other means that could be done. Those contracts will provide for these. It’s an

Q: Are you worried about Oil and Natural Gas Corporation Ltd (ONGC)? People were positively surprised with the kind of subsidy burden they had to bear. It was far lower than what was estimated. If the calls get more shrilled for getting a bit more money out of these downstream companies, do you think it is ONGC that might have to bear the brunt of it?
A: That is something the ONGC management has to argue out with the government. We are looking at the subsidies and cross subsidization on very ad-hog basis. If we are going to reckon incremental revenue by windfall tax just for an argument; then this windfall tax should go as an income to a stabilization fund and the stabilization fund should be used to provide the subsidy to the actual consumer who needs the subsidy.

If we do not balance income and expenditure like we used to do in the OCC (Oil Coordination Committee) days when it was administered pricing officially and legally, windfall tax would be levied even if it has it goes into the concentrated fund of India and that would be the end of it. Then it would continue with the same game of charging fertilizer subsidy and oil subsidy on different company budgets.
So ideally we should have a structure. We have proposed these issues and have discussed that there has to be certain streams, which should come into a stabilization fund and the subsidies should flow out of the stabilization fund with the government several times the last three-four years. That would be a maintainable structure. Otherwise they charge a windfall tax and get some revenue that goes into some other budgetary item, which no one ever knows; the government cannot keep doing this.

Q: What are the pedals of changing the policy for a sector like oil midstream to extract some money from private companies? Do you think this kind of midstream policy changes might come back to haunt the government at a later stage,?
A: There is no policy change. We are talking about specific contracts. There are two groups of contracts, one is Pre-NELP (New Exploration Licensing Policy), which was signed before 2000 and the other NELP contracts. The Pre-NELP contracts have different versions and different editions, but those contracts are just commercial arguments and they could be used for government to charge internal revenue. Those equities were given out for prices, which could have been or should have been much higher. NELP is where the government committed internationally on a stable fiscal regime and that has been marketed on seven rounds of NELP and three rounds of CBM (coal bed methane).

If the government promises a stable regime and then tampers the regime when people have come in and taken a contract, it is not fair. We need to make a clear distinction between government intervention on Pre-NELP contracts and government intervention on NELP contracts.