Published Editorial

Mixed impact of Budget 2013 on oil & gas sector

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Economic Times

by

Sanjay Grover

Tax Partner
EY

The changes in the international crude oil prices make a significant impact on the economy, which in turn, leads to a rise in prices for many essential commodities - increasing inflation. India's oil and gas sector typically contributes over 15% to the GDP. Given the lengthy gestation period and investment risk involved in this sector, industry was looking forward to policy reforms and various fiscal incentives. The Finance Minister has strived to allay the concerns of the oil and gas sector which has been pending for a while viz. natural gas pricing and exploration policy.

Given the increased domestic demand for natural gas, it is imperative to develop unconventional sources of energy like shale gas. The Finance Minister has appreciated this aspect and announced for a policy to encourage exploration and production of shale gas.

The Finance Minister has proposed a review of oil and gas exploration policy for movement from profit-sharing to revenue-sharing contracts. Current Production Sharing Contracts (PSCs) provide for explorers to first recover all of their capital and operating expenditure from oil and gas revenues before sharing profits with the government under a specific formula. However, there were disputes between the Government and the exploration license holders regarding the cost recovery.

This move is expected to resolve these issues as the Government would now be sharing the revenue earned under the PSCs. On the flip side, the exploration license holders may not be able to recover their investment and expense outlays before sharing the revenue with the Government. However, the impact of the same would depend on the methodology for sharing revenue to be introduced under this scheme.

The natural gas pricing policy also is proposed to be reviewed and uncertainties regarding pricing are expected to be removed. The bottlenecks preventing the development of oil and gas blocks awarded under NELP also proposed to be eliminated.

On the tax front, exemption from excise duty has been provided to sulphur recovered as a by-product in refining of crude oil and which is used in manufacture of bentonite sulphur. Further, excise duty and additional customs duty (commonly known as CVD) has been exempted on manufacture and import of dredgers. One-time amnesty by way of waiver of interest and penalty and immunity from prosecution to tax payers who have been non compliant towards filing of returns and payment of service tax dues has been introduced and will be effective on enactment of Finance Bill. As an important amendment, the advance ruling provisions have been extended to cover resident public limited companies.

On the Income-tax front, in addition to normal depreciation, the manufactures will be able to avail additional investment allowance of 15% on purchase of new assets exceeding INR 100cr. This proposed step would attract further investments. Another benefit that would be available is from abolition of the cascading effect on distribution of dividends received by the Indian companies from its foreign subsidiary.

On an adverse side, the exemption from service tax on domestic transportation of petroleum and specified petroleum products by rail or vessel has been withdrawn. The same would increase the input service tax costs.

A major set back which will lead to increase in the tax cost of the oil and gas industry is the increase in Income-tax rates on royalty and FTS from 10.506% to 27.038% for the foreign companies from non-treaty jurisdiction. With the price of oil being regulated, it would be difficult for companies to absorb such a drastic increase in the tax cost. The increase in the Income-tax and surcharge rate of 1.24% will also add to the total tax cost. Another barrier for foreign companies is that the repatriation of profits by way of buy back of shares by Indian companies would be taxable at 20%.

The Union Budget has focused towards introducing policy reforms to provide the much needed impetus to the oil and gas sector. It needs to be seen as to how the policies are implemented. However, the glaring omission in the Union Budget particularly with the extension of the tax holiday period and in providing any substantial tax relaxation and fiscal benefits has left the industry to battle with the economic and financial challenges.

(Views expressed here are personal)