Budget 2013: Treat natural gas on par with crude oil for tax exemptions

 The oil and gas industry is hopeful that the budget may treat natural gas on a par with crude oil for tax exemption.


NEW DELHI: The oil and gas industry is hopeful that the budget may treat natural gas on a par with crude oil for tax exemption, which could revive investors' interest in future auction of oil blocks, but it does not see any strong commitment from the government on this matter.

"We can only hope, but the finance ministry is adamant that the matter, which is sub judice in various IT appellate tribunals, cannot be resolved through the Finance Bill," a senior executive in an upstream firm said requesting anonymity.

The uncertainty over tax holidays for natural gas producers began after the Finance Bill 2008-09 proposed to redefine the term 'mineral oil'. It said the term did not include natural gas for the purpose of enjoying a seven-year tax holiday. Consequently, while crude oil producers avail of the tax benefit, the same is not available to gas producers.

In the 2009 budget, former finance minister Pranab Mukherjee had made a one-time exception for NELP-VIII and allowed tax concession to gas production as well, but restricted the benefit to blocks awarded under that particular round.

Officials also expressed constraints in extending the tax holiday from seven to 15 years, one of the key demands of the Association of Oil Gas Operators (AOGO), which has over two dozen members including BP, BG, ONGC BSE 1.63 %, Reliance Industries BSE 1.51 % and Cairn India BSE -1.06 %.

"It is unlikely that the finance minister will oblige. The country's financial situation is precarious and the finance minister is focused on fiscal consolidation," an official said requesting anonymity.

The oil and gas sector, which has faced acute policy paralysis in last two years, is expecting Finance Minister P Chidambaram to help in bailing out the industry. "As you are aware, the Indian upstream industry has seen a tremendous slowdown in activity. The poor response from private sector to the last few rounds of NELP shows that Indian geology requires fiscal support," the AOGO said in its budget memorandum.

Acute shortage of coal and domestically produced natural gas is pushing power producers to import gas, but they need tax relief because import is about four times costlier. They are demanding duty-free imports of gas. The FM will be under strong pressure to grant some concessions for LNG imports, as many power plants have no fuel. The list of demands is long. The oil ministry wants to impose additional tax on diesel vehicles to check diesilation of the economy, but the automobile lobby is opposing any such move.

Officials say that tax on diesel cars is possible only if diesel prices are not gradually raised to market levels. The cabinet has recently decided to allow oil companies to raise diesel rates by 40-50 paise every month till its price is aligned with international markets.

It is likely that the budget may try to cut the government's oil subsidy burden by changing product-pricing formula on the basis of trade parity to export-linked rates. This will help the government to reduce oil companies' annual revenue losses by about 18,000 crore.

The FM may allow refiners to charge only the export-parity price in the domestic market. Currently, they load a notional import duty on the diesel price, which is actually not paid to the government, officials said. But, the oil ministry is against the move. Oil Minister Veerappa Moily had said earlier that the calculation of subsidy is based on a price formula devised by the Rangarajan Committee.