BUDGET: Oil exploration service tax may go; fuel duty rejig likely

[K.Karthik Raja]

BUDGET: Oil exploration service tax may go; fuel duty rejig likely
Monday, Feb 25

NEW DELHI - The oil and gas sector is betting for some positive
announcements from Finance P. Chidambaram in the Union Budget for
2008-09 (Apr-Mar), which may help strengthen the country's energy
security and reduce the rising import bill.
The most certain relief could be a complete rollback of the 12%
service tax on oil and gas exploration and production, which was
imposed for the upstream sector in the last Budget.
"The industry desperately wants the service tax to be removed from
exploration activities. The rollback would be a big boost for the
sector,"
Ravi Mahajan, partner, Ernst & Young, said.
The tax is imposed on services rendered to oil and gas exploration
companies, including hiring of rigs and other oil services like 2D and
3D seismic studies.
"E&P companies are quite bullish that this tax will be removed.
There is lot of excitement in this sector and the move (to remove the
tax) will give it a further fillip," Arvind Mahajan, head of
infrastructure and government practices, KPMG, said.
"The upstream oil and gas industry hopes the Budget can provide an
impetus for growth, through reduction of corporate tax and provide
fiscal encouragement to oil exploration activities which are high
risk," said Indrajit Banerjee, chief financial officer at Cairn India
Ltd.
The exemption from service tax will also encourage global
companies to enter the country's exploration sector and bid for oil
and gas blocks under the ongoing seventh round of the New Exploration
and Licensing Policy, said V. Raghuraman, senior energy adviser,
Confederation of Indian Industry.
According to an industry official, service tax contribution by E&P
companies during the current financial year is estimated only around
1.2% of the total service tax collections.
"If the service tax burden is removed, it will not have any major
impact on government exchequer," the official said.
"We are suggesting some exemption from levy of service tax on
exploration and production activity. This will give an impetus to oil
and gas exploration," said Oil India Ltd. Director Finance T.K. Ananth
Kumar.
The Petroleum and Natural Gas Ministry has also sought the
exemption in its budget proposals to the finance ministry.
.
DOWNSTREAM DEMANDS
Analysts are also hoping the Budget would rationalise excise
duties on oil products, especially petrol and diesel, to help ease the
mounting
under-recoveries on state-run refinery-cum-marketing companies.
"There could be some rationalisation in the duties to minimise the
impact of high crude prices," Mahajan said.
The excise duty, including ad valorem and specific components, is
15 rupees per 1L on petrol and 5 rupees on diesel.
The ad valorem component comprises about 6% of factory gate price
of petrol and diesel.
The petroleum ministry has suggested the ad valorem excise duty be
scrapped.
"The estimated revenue loss on account of this proposal could be
around 135 bln rupees annually," an oil ministry official said.
A section of the industry is also demanding scrapping of the ad
valorem component in excise duty.
Besides excise duty restructuring, refinery-cum-marketing
companies are also seeking a reduction in the 5% custom duty imposed
on crude oil imports.
"State-run oil marketing companies are badly impacted by the surge
in crude oil. We have been seeking some solution from the government
to reduce the impact of this rise. We would be looking for some
reduction in duties, like customs duty on crude imports and excise
duty on petroleum products,"
said S.V. Narasimhan, director-finance, Indian Oil Corp. Ltd.
The refinery industry is also demanding for an extension of tax
holidays for export-oriented units to 10 years from seven years now.
"India is emerging as a major export hub for petroleum products.
Since investment in the refinery sector has a multiplier effect on the
overall industrial and economic growth of the country, such investment
should be encouraged by offering sops, including extension of benefits
under Section 80I and more attractive export-oriented unit benefits,"
said Naresh Nayyar, managing director, Essar Oil Ltd.
.
OTHER SOPS
The oil and gas industry as well as the ministry have also made
other
demands that will help spur the sector's growth and promote newer
fuels.
The petroleum ministry has sought 'declared goods' status for
natural gas, liquefied natural gas, bio-fuels and bio-diesels in the
Budget to bring these at par with other industrial fuels like coal.
'Declared goods' status brings commodities under a uniform sales
tax regime across different states in the country.
"This will help the natural gas industry in offering lower prices
in
comparison with relatively higher polluting fuels," Manish Baghla,
principal consultant (Oil & Gas Industry Practice) at
PricewaterhouseCoopers, said.
"We are also seeking waiver of customs duty on LNG import for all
sectors," said R.K. Goel, director-finance at GAIL (India) Ltd.
Indraprastha Gas Ltd. Managing Director Om Narayan said Budget
should grant infrastructure status for city gas distribution pipeline
networks that would give them tax relief.
"There should also be no value-added tax on piped natural gas, as
in the case of compressed natural gas," Narayan said.
The oil industry is pushing for infrastructure status for oil
product
pipelines, as has been given to natural gas pipelines. .

K.Karthik Raja
www.kences1.blogspot.com.