In pre-Budget discussions, oil and gas companies in the exploration and production (E&P) sector have called for a significant reduction in taxes on older oil blocks and an expansion of customs duty exemptions on imports. These demands aim to boost domestic production and stimulate capital expenditure, according to a report citing industry sources.
The E&P companies have urged the Finance and Petroleum Ministries to align taxes from previous regimes, such as the New Exploration Licensing Policy (NELP) and Pre-NELP, with the current Hydrocarbon Exploration and Licensing Policy (HELP). The NELP, introduced in 1999, was replaced by the HELP regime in 2017. Industry representatives have suggested reducing the effective tax rate to 40 percent, consistent with global standards, and rolling back the 20 percent oil industry development (OID) cess on pre-NELP blocks.
“Oil and gas extracted from fields awarded under the Pre-NELP regime currently constitute 90 percent of domestic production, with an effective tax rate of 70 percent. In contrast, the tax incidence under NELP and HELP regimes is around 55 percent. This disparity slows down investment recovery and hampers reinvestment in new discoveries,” a senior official from a private sector E&P company said.
While the Special Additional Excise Duty (SAED), or windfall tax, can vary, it typically adds an additional 10 percent to the tax burden. India’s E&P sector is dominated by Oil and Natural Gas Corporation (ONGC) and Oil India Limited, which together account for 80 percent of the country’s crude oil production. Major private sector players include Cairn Oil & Gas (part of the Vedanta group) and Reliance Petroleum (a subsidiary of RIL).
Industry officials are optimistic about the government’s responsiveness to these issues, citing recent reforms such as removing the need for revenue sharing in Category 2 and Category 3 basins and applying concessional royalty rates for timely commercial production.
The report added that the industry has also requested an expansion of the list of customs duty exceptions, which was reduced in 2017. Despite importing 87 percent of its crude oil, India’s crude oil import bill decreased to $139.8 billion in FY24 from $161.4 billion in FY23, primarily due to discounts on Russian oil.
Aiming to reduce import dependence, the government seeks $100 billion in E&P sector investments by 2030, particularly in offshore areas like the Andaman Sea. However, attracting interest has been challenging, with only $2-3 billion in annual capital expenditure , far below the $15-20 billion required to meet targets.
Currently, only 10 percent of India’s 3.36 million square kilometers of sedimentary basins are under exploration, with plans to increase this to 16 percent by the end of 2024. This is still short of the goal to have 1 million square kilometers under exploration by 2030. The government has significantly reduced the ‘No-Go’ areas in India’s Exclusive Economic Zone, enhancing prospects for future exploration.
