Vote on Account 2014: Oil & Gas Sector - road ahead
Associate Director - Tax & Regulatory Services, EY
For an import dependent country like India, oil and gas sector, not only represents the country's growth engine but also provide impetus to the Government (both central and different states) in earning a chunk of its total tax revenue.
Indian oil and gas sector is projected to touch US $ 139,814.7 million by 2015 from US $ 117,562.9 million in 2012, thereby, providing vast opportunities for investors.
And for the growth to sustain and investment to flow in this sector, it is imperative that express clarity is provided in the Indian tax framework for oil & gas sector and new tax reforms should be introduced for this sector.
Although the Budget to be presented by UPA Government in February 2014 is not expected to do much on the policy front (since it will be a vote on account), it will be important for the incumbent government to consider the followings expectations of the oil & gas industry to provide the necessary impetus it requires for growth.
Clarity on deductibility of expenditure for overseas block
As Indian oil & gas companies have acquired energy assets abroad or are aggressively scouting for opportunities outside India with an objective to acquire energy security, clarity should be provided on the deductibility of drilling and exploration activities by an Indian company with overseas block (s), as section 42 of the Indian Income Tax Act, 1961 only provides for deduction of expenditure incurred on drilling and exploration activities in relation to the agreement entered into with the Central Government of India.
Express clarity on applicability of tax holiday provisions to production of natural gas
Tax holiday provisions introduced in 1997 to stimulate investment in the Indian oil and gas sector, always meant to include natural gas within the meaning of the term 'mineral oil'. However, express clarity should be provided in the tax holiday provisions to stop any unnecessary litigation on this matter.
Extension and flexibility to claim tax holiday
Tax holiday for an undertaking engaged in the commercial production or refining of mineral oil, is available for an initial seven years. As in the initial year, the undertakings incur considerable expenditure and actual benefit of tax holiday does not flow to them, there is a need to extend the period of tax holiday to, may be ten years and allow flexibility of choosing this period in the initial fifteen years of operation.
Clarity on presumptive taxation regime for technical assistance
Amendment introduced in 2010 to withdraw the presumptive taxation regime for companies providing 'technical services', even if services are in connection with exploration / production of oil & gas has resulted in litigation and further challenged the almost settled tax position. Therefore, continuation of presumptive taxation regime for technical assistance provided by foreign oil & gas service providers should be clarified.
Deduction for infructuous or abortive exploration expenditure
Deduction for unsuccessful exploration expenses is allowed only in respect of an area surrendered prior to the beginning of commercial production. As a result, deduction of expenses on account of abortive exploration is not available in the year when expenditure was incurred and is permitted only on surrender of area.
As Government of India, in its interest, would want exploration companies to fully explore the areas and not get merely induced by the deduction claim, the condition of 'surrender' of area may be deleted.
Clarity on applicability of service tax on 'cash calls' paid by parent companies to the subsidiaries
Cash calls, being mere contribution of expenses by members of a consortium is a 'transaction in money' and transactions in money have been specifically excluded from the definition of service. Hence, cash calls should not be liable to service tax. However, since there is no specific exclusion provided to cash calls, authorities have wrongly been issuing show cause notices on the issue.
Given the above ambiguity, the Central Board of Excise & Customs (CBEC) should clarify that cash calls being in the nature of a 'transaction in money' should not attract service tax.
Exemption from duties / taxes to exploration sector
Currently, crude oil and natural gas is subject to nil rate of excise duty. Therefore, excise duty and service tax paid goods and services used in exploration and extraction of these products becomes costs to the exploration companies, as these become taxes become non creditable. The inverted duty structure leads to cascading and increase in cost of petroleum products.
An exemption should be provided form duties / taxes levied on goods and services used in the exploration of crude oil and natural gas. Appropriate conditions may be attached, so as to confirm that the input and input services have been directly used in exploration activities.