In a setback to energy firms like ONGC and Cairn India, the government will from this fiscal levy service tax of about Rs 730 crore on royalties they pay to the exchequer on oil and gas they produce.

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Companies currently pay 9.09% of the price they realise on oil and gas produced from onland or onshore fields and 16.67% on the same from offshore areas.

The Central Board of Excise and Customs (CBEC), in a recent clarification, has stated that the licence granted by the government to a company to exploit a natural resource is a taxable service and hence liable for service tax.

As a rule, service tax is paid by the entity providing the service, but in certain cases it is the liability of the party that receives the service to remit the levy under a system called reverse charge.

In the circular clarifying on service tax liability on use of wireless spectrum, CBEC stated that all periodic payments such as royalty on use of natural resources will attract 15% service tax.

Following the clarification, the Service Tax department has sent letters to companies like Oil and Natural Gas Corp (ONGC), Cairn India Ltd and Reliance Industries seeking information on royalty payments, industry sources said.

These companies had paid a total of Rs 4,885 crore royalty on oil and gas produced in 2015-16. Considering change in prices and production profile, the service tax liability would come to over Rs 730 crore this fiscal on top of the royalty payout.

CBEC is using the logic that since service tax is leviable on wireless spectrum, which is a natural resources, the same should extend to oil and gas as well.

Sources said energy explorers through their association have taken up the matter with the Oil Ministry saying their profitability has been severely impacted by slump in oil and gas prices to multi-year low and the additional levy would erode it further.

CBEC in the circular stated that one-time payments for natural resources are exempt from service tax but not any periodic payments. Oil companies have to pay royalty on a monthly basis.

Exemption from payment of service tax is applicable only to "one time charge, payable in full upfront or in installments, for assignment of right to use any natural resource and not to any periodic payment required to be made" such as Spectrum User Charges, license fee in respect of spectrum, or monthly payments with respect to the coal extracted from the coal mine or royalty payable on extracted coal and other natural resources, CBEC has said.