Upstream oil companies hope for incentivised fiscal regime

Richa Mishra New Delhi | Updated on February 18, 2011

A file photo of the venue of New Exploration and Licensing Policy (NELP) VIII and CBM IV bid. — Photo: Ramesh Sharma

In the 2011-12 Budget, the hydrocarbons exploration companies would like the Finance Minister, Mr Pranab Mukherjee, to address fiscal issues specific to the upstream industry. The issues include exploration being exempted from service tax, exemptions on overseas investment expenses, and clarification on all ambiguities arising due to shifting from the current regime to the direct tax code (DTC).

An oil industry official said apart from the existing issues such as tax holiday for natural gas production and exemption from minimum alternate tax, the industry would like that overseas acquisition be so incentivised that more players are open to taking risk.

The official told Business Line that “with global concerns of likely energy deficit, at least in short-to medium term, premiums on acquisitions are also a reality. Depreciation may be permitted on premium paid for acquisition within a ceiling.”

Mitigate currency risks

The industry has sought that Section 42 of the Income Tax Act be amended to enable the deduction of acquisition (farm-in) expenses of domestic companies. It has also proposed that proceeds on sale of overseas investments may be permitted to be retained overseas for a certain period for re-investments in the same sector, the official said, adding that “this shall mitigate currency risks.”

Further, dividends from wholly owned overseas exploration and production ventures may be exempted from corporate tax. This will motivate the private sector players in the business to take additional risks, the official explained.

The farm-in/out concept is where the owner of acreage assigns working interest to another player for a consideration. “In the event of a farm-in, the acquisition costs in India are not deductible. This reduces the activity in the market and goes against the interests of expediting exploration,” the official said.

This is despite the fact that Section 42(2) of the Income Tax Act provides for taxing income arising out of farming out any interest in the block, in the hands of the one who is transferring the stake.

The industry is also seeking clarifications for NELP IX. In NELP IX, bidders have been promised income tax holiday for seven years, in consonance with the existing tax regime which allows 100 per cent tax rebate on production of mineral oil. However, the existing regime is proposed to transition to the Direct Tax Code with effect from April 1, 2012.

DTC is likely to replace profit linked incentives with investment linked incentives.

“There exists an ambiguity as to whether the production sharing contract signed with the respective contractors under NELP IX would be eligible for tax holiday under existing regime or proposed regime since it depends on the date of signing,” the industry official said.

Government has from time to time, conferred declared goods status on various goods of national importance.

This is mainly to keep the input costs low and ensure effective economic substitution of competing goods.

It is under such considerations that nearly all primary energy sources competitive to natural gas such as coal, crude oil, and LPG were granted the status.

Published on February 18, 2011

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