Cairn India may shut down on high cess

airn India, the nation’s largest onshore oil driller, may shut down its operations in the country due to high cess on oil output and the government’s failure to resolve a retrospective tax dispute, the company’s Managing Director and Chief Executive Officer Mayank Ashar told The Hindu.

The move may trigger the exit of one of India’s largest investors in the hydrocarbons sector. The government is yet to act on a Rs. 10,247 crore tax issue that the firm, owned by billionaire Anil Agarwal, faces.

Cairn India is one of the largest foreign investors in India with cumulative investments of $6.5 billion and has a capacity to produce 1.7 lakh barrels of oil a day. It has already cut back production of products that have become economically unviable.

“The sad part is that Cairn has one of the lowest cost structures in the world in oil production, but we are looking at potentially shutting down our oil business in India if the oil prices continue to come down, because of unreasonable government burden such as high cess,” Mr. Ashar said.

The cess on output of oil is fixed at 9 dollars a barrel, regardless of the oil price. So while this cess was less than 10 per cent of costs when oil prices were $100 a barrel, it now accounts for about 33 per cent with oil prices below $30.

“We are not looking for handouts from the government and understand market prices go up and down. But when oil prices marched in 2002 from approximately $25 to $147, the government was very quick in increasing the cess,” Ashar said. When prices started tumbling after June 2014, the government increased excise duties.

“When they were hiking excise duties, they should have also cut the cess,” he argued, terming it as one example of ‘unintended consequences’ of government policy ‘overburdening’ the industry. The curbs on exports that restrict the scope for finding customers and price discovery are another impediment.

The high fiscal and regulatory policy burdens only exacerbate Cairn India’s troubles, steeped as they are in one of the biggest disputes with tax authorities, who have sought Rs 10,247 crore in retrospective taxes and an equivalent sum as penal interest on an eight-year-old corporate transaction. The company said last week that it will seek a billion dollars in damages from the government owing to the dispute.

“I hope that the cess will be reduced (or switched to an ad valorem duty linked to product price) in the Budget, a move due 18 months ago. Otherwise, it will kill both domestic investment and foreign investment in a strategic sector,” Ashar said.

He said in the long-term India’s import dependence for oil is expected to touch 90 per cent from the present level of 75 per cent of consumption at a time when oil prices may reverse upwards.

“The PM and FM’s announcements have been very clear, they don’t like retrospective taxation any more than we do. I would say the government is not knowingly doing the incorrect thing,” Ashar said.

This Sunday, Prime Minister Narendra Modi asserted that retrospective taxation is a matter of past.

“That chapter will not be opened again. We are ensuring that neither this government nor future governments can open this chapter. Whosoever makes investment in the country should know about the taxation system in the country over the next five years, 10 years, 15 years,” Mr. Modi said at the India France Business Summit in Chandigarh. Ashar said he appreciated the government’s efforts to shore up business confidence and move up on the ease of doing business, but said the pace at which problems are solved in India is abysmal.

“In business, in terms of resolution, the system needs to move at Internet speed whereas it is currently like a bullock cart. All businesses have to work with all governments, but the speed is much faster in the rest of the world, and especially when it comes to resolutions,” Mr Ashar said.

“There are bad companies, bad bureaucrats, bad citizens, that’s the world. But you don’t want to penalize, restrain, or hold back companies that are good,” he said. “Even if the right thing eventually happens, companies would have incurred much pain by then.”

The oil business in India, unlike Iran and Saudi Arabia, is far riskier and largely driven by fiscal policy and the burden the government chooses to impose, he said. India is benefiting from low oil prices. Prices are volatile and the economic and geopolitical reality is that they will go up.