The Hindu : Business : Windfall tax violative of NELP policy

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Windfall tax violative of NELP policy

Special Correspondent

‘It should be across the board for a broad spectrum of activities’

NEW DELHI: The demand for imposition of Windfall Profit Tax (WPT) in the oil sector would be in violation of the terms and conditions stipulated in the New Exploration Licensing Policy (NELP) and Production Sharing Contracts (PSCs) that already guarantee higher revenue for the Government in case of abnormally higher profits to private companies.

Officials in the Petroleum and Natural Gas Ministry feel that the WPT cannot be applied unilaterally to the oil sector and it has to be across the board for a broad spectrum of activities. Similarly, it cannot be restricted to private oil companies as any such move would also cover the pubic sector companies. “The oil PSUs are already paying dividend to the Government and sharing the burden of under recoveries. There is hardly any scope to make any kind of adjustment for WPT in the current scenario,” a senior official said.

Fiscal stability

Officials said the NELP policy and the PSCs already notified by the Government provide fiscal stability to the contractors. “There is a legal and sovereign commitment from the Government to provide a stable fiscal regime throughout the contract period,” the official added.

Production sharing

Informed sources said that production sharing model automatically guaranteed a contractor return on the development of marginal fields. At the same time it captures the upsides of big oil and gas discovery and so called super profits resulting from those for the Government by way of an increased production share. These PSCs specify an ad-valorem royalty structure therefore putting in place inbuilt buoyancy in the government’s royalty inflows with increase in price of oil or gas or high oil and gas reserves or lower exploration and development costs. WPT does not help reduce prices and also does not increase production either. It was introduced in United States in 1980 but was repealed in 1988 for its failure to meet the goal of generating the desired revenue.

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