Considering the strategic importance of oil and gas and their influence on other important spheres of the economy, the sector is hoping to receive serious attention from the Modi government. From a tax perspective, if some issues around the income-tax holiday are resolved, it will provide a positive investment climate.

An IT holiday of seven years is allowed to E&P companies engaged in the production of mineral oil from the blocks awarded on or before March 31, 2011. The tax department has been disputing the claim on the production of natural gas, based on a mistaken interpretation.

There doesn’t seems to be a valid rationale for denying the holiday to natural gas production considering that its production is similar to that of crude oil in terms of risk involved, capital required and gestation period. A suitable clarification on tax holiday being made available on the gas produced from all gas blocks is recommended.

Another area of concern is the availability of tax holiday on each well or on cluster of wells. In 2009 an amendment was brought in to provide that all blocks licensed under a single contact shall be considered as a single undertaking for the purpose of a tax holiday. The amendment is not in line with the practical considerations of E&P business; availability of tax holiday on a block basis would result in denial of complete benefit. Exploratory activities are not performed all at once in all areas in a block; they are done according to the approved plan.

The amendment was made on a retrospective basis from tax year 1999-2000, thus prejudging the matter pending in courts. If the government wants to change the policy this should be done on a prospective basis in line with the finance minister’s proposal of providing a non-adversarial tax regime and ease of doing business in India.

The tax holiday drama The industry had been asking for extending the tax holiday from seven to ten years considering it is capital intensive, is high-risk and has a fairly long gestation period. However, the government abruptly withdrew the incentive for production of mineral oil in respect of blocks licensed under contracts awarded after March 31, 2011. Since blocks under the NELP IX bidding round would have been awarded after this date, the income from these blocks would not qualify for the tax holiday. This amendment is not in line with the promises made by the government while inviting bids.

One of the major recommendations of the committee set up to review the production sharing contract regime was to extend the tax holiday period from seven years to at least ten years. The action of withdrawing the tax holiday is in sharp contrast with the recommendations of the committee. It is expected that the proposals made by the Rangarajan Committee would be seriously considered to provide the needed impetus to the sector.

Now’s the time The forthcoming Budget will be the first full-year Budget by this government. It’s an opportunity to revitalise the oil and gas sector by resolving these tax uncertainties and ironing out disputes surrounding tax holiday, which have arisen due to faulty interpretation of the provisions and/or amendments.

The government is currently spending more than ₹8,50,000 crore on oil imports and ₹65,000 crore as subsidies to oil marketing companies that do not help in making India self-sufficient in energy. Compared to this, the government has foregone only a fraction of this amount (₹8,143 crore) on account of tax holiday to the E&P industry.

The writers are with PwC India. The views are personal

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