Alongside resilient economic growth, India has emerged one of the top four consumers of crude oil. As domestic production is limited, the country greatly depends on import of crude oil. Although the first oil discovery was made way back in 1889 in Digboi, Assam, the Indian terrain remains largely underexplored and there is limited data on the sedimentary basins. In order to be better equipped against global uncertainties, and to move towards an energy security agenda, there is need to focus on enhanced exploration activity.

In general, the exploration industry is technology-intensive, and requires a high level of precision to locate hydrocarbon reserves below the earth’s surface. Most of these technologies are not available indigenously, and India relies heavily on foreign oilfield service providers for exploration and production-related services.

These foreign companies typically come to India for short durations and provide exploration services such as 2D and 3D seismic surveys, data interpretation, and mud engineering.

In order to create a congenial environment and to simplify tax compliances for foreign oilfield service providers, the Government introduced a presumptive taxation regime, effective from April 1983. Under this, 10 per cent of the gross revenue of the non-resident oilfield service provider (which covers foreign companies) should be deemed as income for taxation in India. Therefore, Indian tax liability had to be computed on the 10 per cent deemed income — which, based on the existing tax rate, works out to be 4.2024 per cent. It was also construed that such oilfield services shall be outside the ambit of ‘technical services’ for taxation purposes. This presumptive taxation regime played an important role in stepping up exploration activity in the country in the last two decades.

However, over the last few years, revenue authorities have been contending that exploration services shall qualify as technical services, and should be taxed at 10 per cent instead of 4.2024 per cent. This controversy has intensified with the amendment in tax laws under Finance Act 2010, as well as recent judicial pronouncements, including rulings from the Authority for Advance Rulings. Many of them have held that following the amendment in tax law in 2010, the exploration services shall qualify as technical services and, thus, would be liable to higher tax rate of 10 per cent.

The oilfield service providers contend that the presumptive taxation regime should be available to them.

The uncertainty over the taxation of non-resident oilfield service providers is acting as a dampener in the exploration sector. Moreover, it has the effect of increasing the overall exploration cost, as the additional tax cost is invariably passed on to the exploration company.

Keeping in view the economic needs and national interest, it is imperative that clear guidelines are formulated for the taxation of foreign oilfield service providers in India.

(Nabin Ballodia is Partner, KPMG in India)

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