D. Murali

Chennai: In addition to certain benefits that are crucial for its development, the oil and gas industry is hoping that some of the existing tax issues will be resolved in the Budget 2009, notes Vijay Iyer, Tax Partner, Ernst & Young.

In case the Government addresses these issues, there will be a positive impact on the global upstream companies that may consider bidding under the proposed eighth round of the New Exploration and Licensing Policy (NELP), he foresees.

The Finance Minister’s Budget this year will be in the backdrop of growing concerns on global recession and the UPA Government’s commitment of providing necessary support to the economy for ensuring an inclusive growth, observes Iyer, in an email interaction with Business Line. “The oil and gas sector roughly accounts for half of the energy mix of India and deserves continuous support for meeting the future energy needs.”

Excerpts from the interview.

On tax holiday.

The Budget 2008 had put a question on the availability of tax holiday on the production of natural gas, which is considered as a fuel of future. This was contrary to the understanding of the industry players and the specific tax holiday commitments given to the oil exploration and production (E&P) companies in the Production Sharing Contracts (PSC) signed with the Government.

Therefore, E&P companies are looking forward to a positive clarification on the availability of tax holiday on production of natural gas.

The existing tax exemptions for production of mineral oil do not result in full utilisation of the tax benefit. Owing to substantial capital costs incurred at the development stage, companies cannot claim tax holiday in the initial years of production.

In addition, they are liable to pay Minimum Alternative Tax (MAT), even during the tax holiday period. To ensure full advantage of the tax benefit, it is advisable that tax holiday for 7 years should be allowed to be claimed in a block of 10-15 years and no MAT should be charged during that period.

On distribution.

To promote the gas distribution network, the Government had introduced a 10-year tax holiday for setting up of cross-country natural gas distribution network. The legislative intent of giving this tax holiday was to promote the use of natural gas, thereby reducing the existing subsidy burden on LPG.

However, there is a lack of clarity on whether city gas distribution (CGD) network is eligible for tax holiday. In view of the significant investment and lengthy gestation period associated with the setting up of CGD networks, it is imperative that tax incentives are available to companies interested in setting up these networks.

On indirect taxes.

The long-standing demand of E&P companies for the removal of service tax on services utilised by them, and the grant of ‘declared goods’ status for natural gas remain the foremost expectations.

There is also a need to streamline excise duties on petrol and diesel in line with the recommendations by the Dr C. Rangarajan Committee.

On pricing.

On the reforms side, the oil marketing companies are eagerly awaiting the deregulation of petrol and diesel prices. Although the new UPA Government has shown intent to deregulate the pricing structure for auto-fuels, the recent increase in oil prices may delay the implementation.

On GST.

The proposed introduction of Goods and Services Tax (GST) from 2010 is a commendable step towards the rationalisation of indirect taxes. However, initial reports suggest that petroleum products have not been considered for inclusion in the GST regime. There is an expectation that the Government will consider the interests of the industry while implementing GST.

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