Count Down to Union Budget. Oil & Gas: Clarity needed on taxes on royalty, profit share

The Centre has reinvigorated the sector by announcing measures to boost the country’s sluggish output of oil and gas.

While Budget 2016 covered some key policy issues, we are hoping for more clarity from Budget 2017.

First, there is confusion around service tax on royalty and profit share. Globally, royalty in a production sharing contract (PSC) is merely a nomenclature for share of reward to the government. It is noteworthy that PSC by implication is not a service contract. Petroleum-rich countries such as Iran, Iraq and Kuwait adopt a model wherein the government pays a service fee and owns the production. In India, under the PSC, the government and the oil & gas companies are actually co-ventures entitled to their respective shares of production. Neither is the government providing any services nor is royalty and profit share deemed a service.

Unlike the manufacturing/telecom sectors, service tax on hydrocarbon is a cost, as no Cenvat credit is available to upstream companies. The industry requests clarification on non-applicability of service tax on royalty and profit petroleum. Similarly, to encourage more natural gas consumption, the levy of service tax on transmission charges should be exempted.

The second issue is the withholding of tax orders on the sales proceeds of foreign companies in India. These companies file returns, have a registered taxable presence in India, and operate like a domestic company. To provide a level playing field to them, the requirement of withholding tax order should not be applicable.

Finally, there is a need to swiftly decide on the date of inclusion of oil & gas within the GST framework. This will help eliminate stranding of taxes paid by suppliers and the industry at different stages of the value chain, plug tax leakages and bring in operational efficiencies; and enable States and the Centre to capture their full revenue potential. It is also requested that the Oil Industry Development Cess be subsumed within GST.

There is also a need to allow simultaneous exploration and exploitation of all forms of hydrocarbons in all existing contract areas and allow continuous exploration in a producing area. The Centre had issued a permit to the National Oil Companies in 2013. A similar policy needs to be announced for all existing contract areas.

The writer is Chairman of CII’s National Committee on Hydrocarbons, and Region President & Country Head - India of BP Group

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