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Budget wish list: Oil & Gas - Views on News from Equitymaster
 
 
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  • Jun 22, 2009

    Budget wish list: Oil & Gas

    It would be an understatement to say that the fortune of the Indian oil and gas sector is extremely sensitive to government policies. With the date of the Union Budget 2010 fast approaching, the industry is eagerly anticipating measures which will encourage profitable activity. Let us look at some of the key expectations:

    Upstream segment

    1. Income tax holiday on the production of natural gas in line with crude oil.
    2. Flexibility in availing the tax holiday on the production of crude oil in a block of 10 to 15 years.
    3. Removal of minimum alternate tax (MAT) on exploration & production companies.
    4. Accelerated rate of depreciation on equipment used for exploration.
    5. Removal of service tax on exploration activity.

    Downstream segment

    1. Deregulation of fuel prices.
    2. Income tax holiday for city gas distribution.

    Of all the points in the wish list, the most important is the income tax holiday on the production of natural gas. As of now, the tax break is provided only on the production of crude oil because section 80IB (9) of the Income Tax Act, 1961, reads:

    "The amount of deduction to an undertaking which begins commercial production or refining of mineral oil shall be hundred per cent of the profits for a period of seven consecutive assessment years including the initial assessment year."

    This has caused a lot of heartburn to the natural gas sector in India, the prospects of which have looked bright ever since RIL's KG basin gas discovery. It is impossible for explorers to determine in advance whether their effort will lead to the discovery of oil or gas. If they hit upon oil, they get the tax incentive, if they hit upon gas, they don't. As a result, the 7th round of auctions of oil & gas blocks under the New Exploration Licensing Policy received a poor response and the 8th round this year has been postponed to August.

    In fact, the Petroleum Minister has met the Finance Minister to present his case for this sop, and so far it seems that Mr. Mukherjee will address the issue.

     

     

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