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Oil Subsidies: Will Refineries Pass The Buck to Aam Admi?

  • In the Union Budget presented on 16 March, the  finance minister  set aside only Rs 43,500 crore for oil subsidy as against Rs 68,000 crore  paid by the government last year. And that too in a year where Pranab Mukherjee himself admitted that oil prices could remain stubbornly high  at around $125 per barrel.ONGC  chairman Sudhir Vasudeva feels this can be a positive for the sector.  The finance minister has said subsidy burden has to be brought down and a lower allocation for oil subsidy means part of the burden will now be passed on to consumers and “we will not be unduly burdened.”

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  • The government, in this year’s Budget, increased the cess the oil companies paid on each metric tonne of oil from Rs 2,000 to Rs 4,500. This additional cess will cost government oil major ONGC a good Rs 4,500-4,700 crore, said Sudhir Vasudeva in an interview with CNBC-TV18. If one adds the additional duties, the impact on profit before taxes will be Rs 5,000 crore.Vasudeva also said the company had no qualms about paying the additional cess because it was well within the rights of the government to tax. But at the same time, the company needs to price oil at higher level to support its own investment plans and growth.

  • However, the finance minister did not have a clear reply when he was asked on CNBC TV18  if imposing additional cess on ONGC — whose shares had been auctioned just a week back— was a show of poor corporate governance. After all, the cess is a direct negative on the company’s financials and a price sensitive information that should have been revealed before the auction.

  • The finance minister simply said he was not aware of the legal intricacies  of the matter. “The cess is within the control of the government. It is in an Act passed by Parliament via the Regulation Development Act, which empowers the government to impose the cess.”Apart from ONGC, the cess will also affect Cairn India and Oil India. Going by last year’s production estimates, it would mean an additional  burden of Rs 700 crore for Oil India and Rs 10,000 crore for Cairn India.

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