The Hindu Business Line : Budget decision could drill hole in oil co finances

Kolkata, July 7 The Budget decision to retrospectively treat all blocks licensed under a single contract as one undertaking may dog the Indian oil and gas industry for some time to come.

The immediate victims are almost all the gas producers led by ONGC, which initiated the exploration and production (E&P) activity in the country well before the advent of New Exploration Licensing Policy (NELP).

First Tax holiday

In 1997, tax holiday under Section 80-IB(9) of the Income-Tax Act was introduced but gas producers at that time claimed deductions for wells brought on stream after the holiday was introduced claiming each well as an ‘undertaking’ under the said Section. The tax authorities objected to this even then.

But Gujarat State Petroleum Corporation (GSPC) and Niko Resources refused to pay the tax and in appeals to the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal secured favourable rulings.

The decision of the Finance Minister, Mr Pranab Mukherjee, to define ‘undertaking’ as all blocks licensed under a single contract (as opposed to individual wells) with retrospective effect has now queered the pitch for these companies. Initial assessments suggest that the decision could drill a sizable hole in the balance-sheets of a number of companies.

The whole development has unfolded as a cruel joke for ONGC, which after repeated requests was finally allowed by the Centre to approach the Income-Tax Appellate Tribunal, reportedly seeking refund of Rs 3,000 crore of income-tax for merely two assessment years, 2002-03 and 2003-04, based on the premise of each well being an ‘undertaking’.

Unlike other operators that enjoyed deductions, ONGC kept paying taxes till it saw a reasonable opportunity of seeking refund, citing precedence of the Tribunal’s rulings in the cases of Niko and GSPC in 2008. The case filed recently was to come up for hearing later this month.

When contacted, the ONGC Chairman Mr R. S. Sharma, said the development could ruin the company’s prospect of seeking refund of “thousands of crores of rupees”. “We have not enjoyed any deductions, so our balance-sheet is protected from any impact.”

GSPC’s deductions

According to the annual report of 2005-06, GSPC claimed deductions of approximately Rs 237 crore between 1996 and 2004 primarily for its gas production from Hazira. The actual deductions enjoyed till 2008-09 will be much higher. And, if the Budget decision is implemented, GSPC may have to repay the disputed amount. GSPC officials, however, say that they are yet to assess the exact impact.

Similarly, Niko, GSPC’s partner in Hazira, had separately enjoyed deductions (the amount is not known) and could face the same situation.

It may be mentioned that companies such as British Gas, Reliance, Cairn, and Hardy Oil have entered the country before NELP and were the only gas producers till Reliance’s D6 field came on stream recently. According to sources, Cairn also enjoyed similar deductions for its Ravva and Cambay fields. Comments, however, were not available from Cairn in this regard. The status of others is yet to be ascertained.