| Although the last year witnessed the global economic meltdown impacting major economies of the world, the Indian economy largely withstood it. The oil & gas industry has been instrumental in sustaining the growth rate of the Indian economy. The petroleum & natural gas sector, which includes transportation, refining and marketing of petroleum products and gas-constitutes over 15% of the country's GDP.
Other than this, it also acted as a critical element in propelling other sectors of the economy. Financial year 2009-10 has been a landmark one for additional production of oil& gas in India.
Commencement of crude oil production by Cairn Energy in Rajasthan, large oil discoveries by Reliance in the Krishna-Godavari basin and improved oil recovery projects by oil companies have supported the growth to a larger extent. The increased production will help reduce the country's oil imports, saving foreign exchange and leading to higher economic development and an increase in the GDP growth rate. India's domestic demand for oil & gas is on the rise. According to the petroleum ministry, demand for oil & gas is likely to in-crease from 186.54 million tonnes of oil equivalent (mmtoe) in 2009-10 to 233.58 mmtoe in 2011-12. With Nelp-VIII, the overall number of blocks brought under exploration has exceeded 200, enhancing the oil production.
The development of the oil & gas sector leads to energy security, employment and welfare of the community. With the Budget around the corner, the sector looks forward to fiscal incentives that would boost the sector's capital outlay this can extend to the hitherto untapped areas and also to those areas that have a lower probability of striking oil reserves.
In addition to the optimisation of tax holiday by providing flexibility to claim it in a block of 10-15 years, a weighted deduction of say, 150% of the actual expenses incurred in, respect of exploratory cost should be provided. Further, the tax holiday available for profits from the production of natural gas from Nelp-VIII blocks should be extended to pre-Nelp and CBM blocks.
The industry hopes that the application of MAT provisions would be suspended during the tax holiday period.
The long-standing demand for the removal of the service tax on the services utilised by E&P Companies, needs to be addressed. The service tax is imposed on the input used by E&P companies, but since there is no output service tax or excise duty liability against which they can claim credit, this increases the cost burden. The industry looks forward to the declared goods status for natural gas. It would apply a lower sales tax rate on industrial goods, as against the present prevalent rate that varies from state to state between 12.5% and 20%, except in Rajasthan where 4% taxis levied.
Looking at the volatile trend of crude oil prices and under-recoveries made by Oil Marketing Companies (OMCs), the time is ripe for the government to take the right move in the sector. More so in light of the Parikh Committee report that has recommended deregulation in the pricing of transport fuel. Given the impact on inflation deregulation might have, it would have to be blunted by the right set of monetary policies.
Taranpreet Singh, senior tax professional-Oil & Gas, EY has also contributed to this article. Financial Express, New Delhi, February 22, 2010
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