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18 Jan 2026·Source: The Hindu
3 min
EconomyNEWS

Oil & Gas Sector Seeks Review of Cess on Production

Oil and gas industry advocates for a review of OID cess to boost exploration.

Oil & Gas Sector Seeks Review of Cess on Production

Photo by Christian Harb

In the lead-up to the Union Budget 2026, the petroleum industry is advocating for a review of the oil industry development board (OID) cess, which is currently levied at 20% on an ad-valorem basis on production from nomination blocks. Industry sources suggest a slab-system approach based on incremental oil prices. They argue that this review, alongside incentives for exploration activities in both mature and frontier fields, and upgrades to refinery capacity, could assist diversification efforts. The industry seeks the OID cess to be reviewed on a slab system, considering the fluctuations in global oil prices.

Key Facts

1.

OID cess: 20% ad-valorem on production

2.

Industry wants: Slab-system approach

UPSC Exam Angles

1.

GS Paper III: Economy - Government Budgeting, Fiscal Policy

2.

Connects to: Energy Security, Investment Models, Taxation

3.

Potential Question Types: Statement-based, Analytical

Visual Insights

More Information

Background

The Oil Industry (Development) Act of 1974 established the Oil Industry Development Board (OIDB). The OIDB was created to provide financial assistance for the development of the oil and gas sector. The OID cess, levied under this act, is a key source of funding for the OIDB.

Initially, the cess was intended to promote self-sufficiency in oil and gas. Over the years, the rate and method of calculation have been subject to changes based on the prevailing economic conditions and government policies. The rationale behind the cess has always been to generate funds for investment in the oil and gas sector, but its impact on production costs and industry profitability has been a recurring point of contention.

Latest Developments

In recent years, the oil and gas sector has faced increasing pressure due to fluctuating global prices and the push for renewable energy. The government has been exploring various measures to incentivize domestic production, including adjustments to the fiscal regime. The debate around the OID cess is part of a broader discussion on how to balance revenue generation with the need to attract investment in the sector.

The industry's call for a slab-based system reflects a desire for greater predictability and stability in the face of volatile market conditions. Future policy decisions will likely consider the impact of the cess on both government revenues and the competitiveness of the domestic oil and gas industry.

Practice Questions (MCQs)

1. Consider the following statements regarding the Oil Industry Development Board (OIDB): 1. It was established under the Oil Industry (Development) Act of 1974. 2. Its primary function is to provide financial assistance for the development of the oil and gas sector. 3. The OIDB is funded exclusively through budgetary allocations from the central government. Which of the statements given above is/are correct?

  • A.1 and 2 only
  • B.2 and 3 only
  • C.1 and 3 only
  • D.1, 2 and 3
Show Answer

Answer: A

Statements 1 and 2 are correct. The OIDB was established by the 1974 Act and provides financial assistance. Statement 3 is incorrect because the OIDB is primarily funded through the OID cess, not exclusively through budgetary allocations.

2. Which of the following best describes the term 'ad-valorem' as used in the context of the OID cess?

  • A.A fixed amount levied per unit of production.
  • B.A tax levied as a percentage of the value of the goods or services.
  • C.A tax levied based on the volume of production.
  • D.A tax levied on the profits of the oil companies.
Show Answer

Answer: B

Ad-valorem means 'according to value'. Therefore, the OID cess levied on an ad-valorem basis is a percentage of the value of the oil produced.

3. Assertion (A): The petroleum industry is advocating for a review of the OID cess, suggesting a slab-system approach based on incremental oil prices. Reason (R): A slab-system approach could provide greater predictability and stability for the industry in the face of volatile global oil prices. In the context of the above statements, which of the following is correct?

  • A.Both A and R are true and R is the correct explanation of A.
  • B.Both A and R are true but R is NOT the correct explanation of A.
  • C.A is true but R is false.
  • D.A is false but R is true.
Show Answer

Answer: A

Both the assertion and the reason are true, and the reason correctly explains why the industry is advocating for a slab-system approach.

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