Budget 2014: Should Rationalise Tax for Oil and Gas Sector
Partner and Tax Leader
Oil and Gas practice at EY
During the last decade, India's oil and gas imports have been rising due to increased oil and gas consumption. The domestic production has been unable to keep pace with the rising demand. Given this, apart from various policy measures, the government can initiate fiscal measures to boost the investment in oil and gas sector and secure economic growth.
From E&P (exploration and production) companies' perspective, several issues on the tax holiday for production of mineral oils need resolution. Firstly, tax authorities have been denying this benefit on natural gas on the basis that natural gas does not fall within ambit of the term 'mineral oils'. They also argue that a specific reference has been made where the legislature intended to provide tax holiday benefit (such as for blocks awarded under NELP VIII). Considering that production of natural gas is adjunct to production of petroleum, there ought to be parity in the tax treatment of natural gas and petroleum.
Secondly, tax holiday provision was retrospectively amended from 1999-2000 to specify that all blocks licensed under a single contract shall be considered as a single undertaking. Given the very nature of this business, wells within the same block commence production on staggered basis. This amendment effectively results in denial of tax holiday benefit to wells that commence production later and thus, lesser benefit to E&P companies. Well-wise or field-wise tax holiday claim should be allowed.
Thirdly, due to high exploration costs, E&P companies are unable to benefit from the tax holiday as they make miniscule profits/losses in the first few years. It is recommended that the period for claiming tax holiday be aligned with the infrastructure sector i.e., amend the current 7 years from year of commercial production to 10 out of 15 years from year of commercial production.
Presently, deduction for unsuccessful exploration expenses is allowed only in respect of a surrendered area. Such requirement of surrendering the area for availing deduction for abortive expenditure induce E&P companies to surrender the area without fully exploring the same, which is not in interest of the industry and the country. Therefore, the Government should withdraw this condition.
Presumptive taxation regime is available to foreign oilfield services providers whereby 10 per cent of gross revenue is deemed to be profit. In 2010, an amendment was introduced carving out technical services from presumptive taxation and subjecting them to net basis taxation. This has significantly increased compliance cost, upended well settled positions and led to rise in litigation. The government ought to withdraw this amendment as this translates into reduced interest from reputed service providers to work in India.
In the mid-stream and downstream sector, investment-linked incentive of 100 per cent deduction of pre-commencement capital expenditure is allowed for laying and operating a cross country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities. This incentive ought to be extended to dedicated pipelines and intra-city and intra-state gas distribution networks as this will help develop infrastructure required for supporting economic growth.
Further, 10 year profit-linked incentive available to infrastructure facility should be extended to LNG terminals in view of huge expenditure incurred to set up and operate the terminals.
On the indirect tax front, natural gas is not a 'declared' good, unlike coal and crude oil and hence, natural gas is subject to VAT rate of up to 20 per cent, instead of a cap of 4 per cent applicable to declared goods. Declared goods status should be extended to natural gas in order to optimize VAT liability.
Considering the huge capital investment and uncertainty involved in the exploration activity, service tax leviable on exploration activities should be withdrawn.