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Energy firms must pay service tax on royalties paid to govt

New Delhi: For India’s oil and gas companies struggling with a near-halving of prices in the last one year, a fresh levy awaits in the new financial year.

Energy explorers such as Oil and Natural Gas Corp. Ltd, Reliance Industries Ltd and Cairn India Ltd must cough up service tax on the royalties they pay the government with effect from 1 April, under a recent finance ministry decision. According to the Central Board of Excise and Customs (CBEC), when the government grants licence to a company to exploit a natural resource, it is a taxable service, and hence liable for service tax.

Usually, service tax is paid by the entity that provides the service, but in certain cases such as this, it is the liability of the party that receives the service to remit the levy under a system called reverse charge.

The CBEC issued a circular on 13 April, primarily relating to service tax liability on use of wireless spectrum, which is considered a natural resource. The note clarified that all periodic payments such as royalty on use of natural resources attract a service tax. According to a finance ministry official, who asked not to be named, the same logic applies to royalty payments on oil and gas fields as well.

Company executives Mint spoke to said, on condition of anonymity, that they are working on a representation to the government seeking relief.

In 2014-15, ONGC, India’s largest oil producer, p