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The Modi government is keen to take up administrative and judicial reforms in a big way, but the actions of the Gujarat government may become a stumbling block.
A case in point is the Gujarat government’s decision to collect a royalty of 20 per cent on the discount given by the Oil and Natural Gas Corporation (ONGC) on sale of crude to downstream oil PSUs. It stands to reason that royalty or cess should be levied on the sale price (after discount), as has been established by precedent as well.
However, the Gujarat government’s decision was upheld by the Gujarat High Court (GHC), which, on November 30, 2013, ordered ONGC to pay dues of around ₹10,000 crore retrospectively from April 2008.
ONGC challenged GHC order in the Supreme Court (SC). On February 13, 2014, SC stayed GHC’s order but directed ONGC to pay royalty at the pre-discount price from February.
The order threatens to strain the finances of ONGC at a time when it is hard pressed for funds needed for investment in exploration and production of oil and gas.
The genesis
Until a little over a decade ago, petroleum products were covered under an administered price regime (APR). Downstream PSUs, namely, 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’ prices.)
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 cost. These inflows and outflows were administered through the Oil Pool Account (OPA). Depending on international price of crude versus the 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 the 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’. It was also a precursor to a phased programme for elimination of subsidies.
The UPA government was never serious about reducing subsidies but was keen on avoiding stress on the budget. Therefore, it came up with the 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 at the rate of 20 per cent on the market value of the crude oil it extracts from oil blocks to the state government.
Despite supplies at prices net of discount, ONGC continued to pay royalty on pre-discount prices till March 31, 2008 (excess amount paid during this period was ₹3,419 crore). However, from April 1, 2008, under instructions from central government, ONGC started paying royalty on price net of discount. The Gujarat government challenged this on September 27, 2011 (a delay of around 42 months is inexplicable) insisting that royalty be paid on pre-discount price — the case is now before the Supreme Court.
Strange turnaround Charging royalty on discount/subsidy too is illogical. A levy can be collected only on sale price. Any levy increases the cost of the product. This makes no sense, as that is reimbursed as subsidy by the Government. In 1988, Tamil Nadu, Andhra Pradesh and Kerala raised a similar demand for sales tax on subsidy received by fertiliser manufacturers under the retention price scheme with retrospective effect, in the case of Tamil Nadu.
Subsidy is not a part of realisation from sale and therefore, imposition of sales tax is illogical. Indeed, high courts in Andhra Pradesh, Kerala and Uttar Pradesh held that ‘demand for sales tax on subsidy was untenable’. Those judgements were upheld by Supreme Court. The Gujarat government — through a circular issued under Gujarat Sales Tax Act (1969) — directed officials not to press for the same. Why then the reversal with regard to sale of crude?
The writer is a policy analyst
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