No Significant Boost Given to Oil & Gas Sector in Budget
Partner and Tax Leader- Oil and Gas, EY
Increased oil and gas consumption has resulted in ever rising imports which has further resulted in increased subsidy, rising import bill and thereby has negatively impacted the fiscal deficit and increased the prices. Thus there is a need to enhance domestic production and India's energy security. Oil and gas industry was expecting effective policy reforms and tax measures in the budget which could provide stimulus to the industry. These expectations were further enhanced by Modi government's objective to achieve accelerated growth rate and fiscal consolidation.
The Finance Minister in his first Budget announced on Thursday, has expressed the new government's intention to accelerate production and exploration of coal bed methane reserves. Further it has been to explore possibility of using modern technology to revive old or closed wells. The Finance Minister has proposed to develop additional 15,000 km of gas pipeline systems to complete the gas grid across India using appropriate Public-Private Partnership models. These measures are expected to boost production and usage of mineral oil and gas.
On the income-tax front, couple of issues affecting the industry required clarification such as applicability of tax holiday to natural gas, and applicability of presumptive taxation regime for technical assistance provided by foreign players. However, though there are generic tax reforms which would impact the industry, industry specific tax reforms have been omitted.
In addition to depreciation and existing investment allowance of 15 per cent, manufacturers will be able to avail a similar additional investment allowance with a lower threshold of Rs. 250 million investments from 1 April 2014 up to 31 March 2017. This deduction will be available on a year on year basis till 31 March 2017.
Another benefit that has been proposed is extension of concessional tax rate of 15 per cent on dividends received by Indian companies from its subsidiary foreign company indefinitely. Also, the 5 per cent concessional withholding tax on interest payments by an Indian company on issue of long term infrastructure bonds has been extended to any long term bond.
The time limit for deposit of taxes withheld from payments to residents up to due date of filing return of income is now extended to taxes withheld from payments to non-residents. Also, a restricted 30 per cent disallowance of expenditure has been proposed where taxes have not been withheld and/or deposited with the government from payments to residents. Another welcome change is introduction of 'roll-back' mechanism up to 4 years for applicability of an advance pricing agreement for transaction with related parties.
On an adverse side, dividend distribution tax would now be levied on the gross amount of dividend distributed/payable to the shareholder, instead of the net amount.
Although not proposed as a part of the legislation, the Finance Minister has expressed the following to achieve a stable tax regime:
No retrospective amendments to be introduced which create a fresh liability
High Level Committee to constituted to scrutinise fresh cases falling under the retrospective amendment relating to taxability of indirect transfer
Advance ruling mechanism to be extended to resident taxpayers
Scope of Income-tax Settlement Commission to be enlarged
On the indirect tax front, specific excise and custom duty rates have been rationalised for coal and branded petrol. However, to fund environmental projects, clean energy cess on coal increased from Rs. 50 per tonne to Rs. 100 per tonne.
Welcome retrospective amendment is customs duty exemption on mineral oil produced in continental shelf/exclusive economic zone and imported prior to 7 February 2002. Similarly, basic customs duty has been exempted retrospectively on liquefied propane/ butane and LPG imported by IOCL, HPCL or BPCL for specified supplies.
It has been clarified that exemption available for supplies against International Competitive Bidding also extends to sub-contractors for manufacture and supply of goods on behalf of the main contractor.
A serious dampener is substantial increase in service tax interest rates from 18 to 30 per cent (for delays over one year), given the litigation involving issues of interpretation. Other severe measures include restriction on the period for claiming Cenvat credit to just 6 months and amendment of Cenvat rules to disallow transfer of credit by a large tax payer (LTU).
However, introduction of mandatory pre-deposit of 7.5 and 10 per cent of tax/duty and penalty with a ceiling of Rs. 10 crores at the levels of Commissioner Appeals and CESTAT respectively is retrograde.
Though no clear guidelines have been announced in the Budget for introduction of GST and DTC, the Finance Minister's comments on review of DTC and firm resolution on key areas of disputes with States within the year are positive.