Tax framework in oil industry

TAX FRAMEWORK
The petroleum sector is a strategic industry for the
economy and has traditionally been closely regulated,
with the exploration and production activities being
primarily concentrated in public sector companies. In
order to attract private investment in the oil and gas
sector, in 1999, the Government of India (“GoI”)
formulated the New Exploration Licensing Policy (“NELP”
or the “Policy”). The Policy sought a paradigm shift from
the pre-NELP regime under which ONGC and OIL were
granted a “Petroleum Exploration Lease” on a nomination
basis.
The Policy framework seeks to provide a level playing
field to the domestic public sector companies, private
companies, and foreign companies, by offering similar
regulatory and contractual terms for exploration and
production of oil and gas. Also included is a seven year
tax holiday from the date of commencement of
commercial production.
In 2008, one of the announcements made in the Union
Budget generated immense debate relating to the tax
holiday for the upstream and refining sectors. The
Finance Minister proposed to amend the existing
provision of section 80IB (9) of the Income tax Act, 1961
(“IT Act”) to insert a sunset clause of a tax holiday for
refining of mineral oil. As per the amendment, the tax
holiday would not be available for an undertaking which
begins the refining of mineral oil at any time on or after
April 1, 2009. In the finalized law, the tax holiday was
extended till March 31, 2012, for notified public sector
refineries; however, the maximum collateral damages
that emerged affected upstream oil and gas producers.
UPSTREAM TAXATION SYSTEM:
We are aware that to provide financial encouragement to
the upstream companies in India, the Government has
provided certain tax incentives in the Production Sharing
Contract. Accordingly, the Government has gradually
revised the rates on royalty and various taxes and duties.
India has a hybrid system of Production Sharing
Contracts’ (PSC) containing elements of royalty, as well
as sharing of production with the Government.
Companies enter into a PSC with the Government of India
to undertake exploration and production (E&P) activities
[4].
Taxation of the E&P sector was traditionally driven with
the objective of attracting investments and expertise to
secure India’s energy resources. An attempt has been
made to keep this objective in mind in the new legislation,
i.e. the Direct Taxes Code (DTC), proposed to be enacted
from 1 April 2012 but again been deferred in Budget
2012 , as well. Taxation of such companies is not only
governed by the Income Tax law but also by the
Production Sharing Contract (PSC) entered into between
the Government and E&P players. In light of a judicial
ruling by the Supreme Court of India, in the event of a
conflict between the provisions of the law and the PSC,
the provisions of PSC is to be applied[5].
Royalty Regime
Central Government is entitled to get Royalty on Oil and
Gas produced from the offshore fields whereas in case of
onshore fields it is payable to concerned State
Government. The power of regulation and responsibility
for the development of oil fields are exclusively within the
domain of the Central Government. Oil Fields (Regulation
and Development) Act, 1948 and the Petroleum and
Natural Gas Rules, 1959 deal with it.
The Royalty on production from fields awarded under
PSCs is governed by the provisions of the respective
PSCs and the receipts in this regard depend upon the
actual production from the various fields. The PSC
provides protection in case changes in Indian law result
in a material change to the economic benefits accruing to
the parties after the date of execution of the contract.
Land areas — payable at the rate of 12.5% for crude
oil and 10% for natural gas
Shallow water offshore areas — payable at the rate
of 10% for crude oil and natural gas.
Deep-water offshore areas (beyond 400m isobaths)
— payable at the rate of 5% for the first seven years
of commercial production and thereafter at a rate of
10% for crude oil and natural gas.
The wellhead value is calculated by reducing the
marketing and transportation costs from the sale price of
crude oil and natural gas.
Income tax regime
The Indian Income Tax Act (‘Act’) provides special
provision for taxability of upstream companies. Section
42 of the Act lists downs the allowability of certain
categories of expenditure as are specified in the PSC:
Expenditure by way of infructuous or abortive
exploration
Expenditure incurred for exploration or drilling
activities or services or assets used for these
activities
Depletion of mineral oil in the mining area post
commercial production
It further provides that such allowances shall be
computed and made in the manner as specified in the
PSC, and the other provisions of the Act being deemed for
this purpose to have been modified to the extent
necessary to give effect to the terms of the PSC.
Accordingly, for such kind of expenditure, one has to
examine the relevant provisions of the PSC.
Article 17 of the Model PSC5 provides for the following
specific allowances in computing the taxable income of
the E&P companies:
Exploration and drilling expenditure, both capital
and revenue in nature, is 100% tax deductible.
Expenditure incurred on development and
production activities (other than drilling
expenditure) is allowed as per the provisions of the
Income tax Act (“the Act”)
All exploration and drilling expenditure is allowed
to be aggregated till year of commencement of
commercial production. Alternately such
expenditure may be amortized equally over a 10-
year period from start of commercial production.
DOMESTIC TAX LAWS
The contractor under NELP is required to pay taxed under
Indian Income tax Act, 1961. The broad provisions under
domestic tax laws are highlighted as below:
Corporate tax rates
Domestic companies are subject to tax at a rate of 30%
and foreign companies at a rate of 40%. In addition, a
surcharge (7.5% on tax for a domestic company and 2.5%
on tax for a foreign company) must be paid if income is
in excess of INR10 million. An education levy of 3% also
applies. The effective corporate tax rates are as follows:
Minimum Alternate Tax
Minimum alternate tax (MAT) applies to a company if the
tax payable on its total income as computed under the
tax laws is less than 18 % of its book profit (accounting
profits subject to certain adjustments). If MAT applies,
the tax on total income is deemed to equal 18 % of the
company’s book profit. Credit for MAT paid by a
company can be carried forward for 10 years and it may
be offset against income tax payable under domestic tax
provisions. Due to the MAT regime, a company may be
required to pay some tax, even during the tax holiday
period.
Key changes under Budget 2012:
It has been proposed to expand the scope of MAT on
non-corporate taxpayers if they are claiming tax holiday.
Consequential amendment for availability of credit of
MAT has also been provided[6].
Ring-Fencing
No ring-fencing applies from a tax perspective; therefore,
it is possible to offset the exploration costs of one block
against the income arising from another block.
Treatment of Exploration and Development Costs
All exploration and drilling costs are 100% tax deductible.
Such costs are aggregated till the year of commencement
of commercial production. They can be either fully
claimed in the year of commercial production or they can
be amortized equality over a period of 10 years from the
date of first commercial production. Development costs
(other than drilling expenditure) are allowable under the
normal provisions under the domestic tax law.
PRODUCTION SHARING CONTRACT REGIME
India has a hybrid system of PSCs containing elements of
royalty as well as sharing of production with the
Government. E&P companies (contractors) that are
awarded the exploration blocks enter into a PSC with the
Government for undertaking the E&P of mineral oil. The
PSC sets forth the rights and duties of the contractor. The
PSC regime is based on production value.
Cost Petroleum or Cost Oil
Cost petroleum is the portion of the total value of crude
oil and natural gas produced (and saved) that is allocated
toward recovery of costs. The costs that are eligible for
cost recovery are:
Exploration costs incurred before and after the
commencement of commercial production
Development costs incurred before and after the
commencement of commercial production.
Production costs
Royalties
The unrecovered portion of the costs can be carried
forward to subsequent years until full cost recovery is
achieved.
Profit Petroleum or Profit Oil
Profit petroleum means the total value of crude oil and
natural gas produced and saved, as reduced by cost
petroleum. The profit petroleum share of the Government
is biddable by the contractor. The blocks are auctioned
by the Government. The bids from companies are
evaluated based on various parameters including the
share of profit percentage offered by the companies.
The law has no caps on expenditure recovery. The
percentage of recovery of expense incurred in any year is
as per the bids submitted by the companies. Further, no
uplift is available on recovered costs.
The costs that are not eligible for cost recovery[7] are as
follows:
Costs incurred before the effective date[8] including
costs of preparation, signature or ratification of the
PSC.
Expenses in relation to any financial transaction to
negotiate obtain or secure funds for petroleum
operation. For example, interest, commission,
brokerage, fees and exchange losses.
Marketing or transportation costs.
Expenditure incurred in obtaining, furnishing and
maintaining guarantees under the contract.
Attorney’s fees and other costs of arbitration
proceedings.
Fines, interests and penalties imposed by courts.
Donations and contributions.
Expenditure on creating partnership or joint venture
arrangement.
Amounts paid for non-fulfillment of contractual
obligations.
Costs incurred as a result of misconduct or
negligence of the contractor
Costs for financing and disposal of inventory.
The PSC provides protection in case changes in Indian
law result in a material change to the economic benefits
accruing to the parties after the date of execution of the
contract.
CAPITAL ALLOWANCES
Accelerated depreciation:
Depreciation is calculated using the declining-balance
method and is allowed on a class of assets. For field
operations carried out by mineral oil concerns, the
depreciation rate is 60% for specified assets[9] while the
generic rate of depreciation on the written-down basis is
15% (majority of the assets fall within the generic rate).
Further, additional depreciation of 20% is available on the
actual cost of new machinery or plant[10] in the first
year.
INCENTIVES
Tax holiday
A seven-year tax holiday equal to 100% of taxable profits
is available for an undertaking engaged in the business
of commercial production of mineral oil or natural gas or
refining of mineral oil.
Carry forward losses
Business losses can be carried forward and set off
against business income for eight consecutive years,
provided the income tax return for the year of loss is filed
on time. For closely held corporations, a 51% continuity
of ownership test must also be satisfied.
Unabsorbed depreciation can be carried forward
indefinitely.
Research &Development
Expenditures on scientific research incurred for the
purposes of the business are tax deductible.
Deduction for site restoration expenses
A special deduction is available for provisions made for
site restoration expenses if the amount is deposited in a
designated bank account. The deduction is the lower of
the following amounts:
The amount deposited in a separate bank account
or “site restoration account”
Twenty percent of the profits of the business of the
relevant financial year.
WITHHOLDING TAXES
The following withholding tax rates apply to payments
made to domestic and foreign companies in India:
Table: 1
NATURE OF INCOME RATE (%)
Domestic Company Foreign
Company*
DIVIDENDS** 0% 0%
INTEREST 20% 20%***
FEES FOR
PROFESSIONAL OR
TECHNICAL FEES
10% 10%
NON- RESIDENT
CONTRACTOR
Maximum
40%****BRANCH REMITTANCE TAX0%0%
For countries with which India has entered into a tax
treaty, the withholding tax rate is the lower of the treaty
rate and the rate under the domestic tax laws on
outbound payments.
* The rates are to be further enhanced by the surcharge
and education levy (cess).
** Dividends paid by domestic companies are exempt
from tax in the hands of the recipient. Domestic
companies are required to pay Dividend distribution tax
(DDT) at 16.61% on dividends paid by them.
*** This rate applies to interest from foreign currency
loans. Other interest is subject to tax at the rate of 40%
(plus applicable surcharge and education cess).
**** Subject to treaty benefits. If a permanent
establishment is constituted in India, the lower
withholding tax rate depends on profitability.
FINANCING CONSIDERATIONS
Thin capitalization limits
There are no thin capitalization rules under the Indian tax
regulations. Under the exchange control regulations,
commercial loans obtained by an Indian company from
outside India are referred to as external commercial
borrowings (ECBs). ECBs are permitted for capital
expansion purposes. ECBs can be raised from
internationally recognized sources such as international
banks, international capital markets and multilateral
finance institutions, export credit agencies, suppliers of
equipment, foreign collaborators and foreign equity
holders (subject to certain prescribed conditions
including debt-to-equity ratio).
Interest quarantining
Interest quarantining is possible, subject to the exact fact
pattern.
TRANSACTIONS
Asset disposals
A capital gain arising on transfer of capital assets (other
than securities) situated in India is taxable in India (sale
proceeds less cost of acquisition). Capital gains can
either be long term (capital assets held for more than
three years except for securities where it is required to be
held for more than one year) or short term. The rate of
CGT is as follows:
PARTICULARS RATE (%) [11]
Short-term capital gains Long-term
capital gains*
[12]
Resident Companies 30% 20%
Non-residents 40% 20%
* The rates are to be further enhanced by the surcharge
and education levy.
A short-term capital gain on transfer of depreciable
assets is computed by deducting the declining-balance
value of the classes of assets (including additions) from
the sale proceeds.
FARM IN AND FARM OUT
No specific provision applies for the tax treatment of farm
in consideration, and its treatment is determined on the
basis of general taxation principles and provisions of the
PSC. However, special provisions do determine the
taxability of farm out transactions in the certain
situations.
SELLING SHARES IN A COMPANY (CONSEQUENCES FOR
RESIDENT AND NON-RESIDENT SHAREHOLDERS)
Listed securities on a stock exchange
The transfer of listed securities is exempt from long-term
CGT provided that securities transaction tax is paid.
Short-term capital gains are taxable at a reduced rate of
15%.
Transfer of listed securities outside a stock exchange
Long-term capital gains derived from the transfer of
listed securities are taxed at the rate of 10% (without
allowing for indexation adjustments) or at the rate of 20%
with indexation benefits. Short-term capital gains are
taxable at the rate of 30% and 40% for resident
companies and non-resident companies, respectively.
Unlisted securities
The CGT rate applicable to transfers of unlisted securities
is as follows:
PARTICULARS RATE (%) [13]
Short-term capital gains Long-term
capital gains*
[14]
Resident Companies 30% 20%
Non-residents 40% 20%
* The rates are to be further enhanced by the surcharge
and education levy.
TRANSFER PRICING
The Income Tax Act includes detailed transfer pricing
regulations. Under these regulations, income and
expenses, including interest payments, with respect to
international transactions between two or more
associated enterprises (including permanent
establishments) must be determined using arm’s length
prices. The transfer pricing regulations also apply to
cost-sharing arrangements.
The Act specifies methods for determining the arm’s
length price:
Comparable uncontrolled price method
Resale price method
Cost plus method
Profit split method
Transactional net margin method
Any other method prescribed by the Central Board
of Direct Taxes (CBDT)
The CBDT has issued the regulations for applying these
methods to determine the arm’s length price. The transfer
pricing regulations require each person entering into an
international transaction to maintain prescribed
documents and information regarding a transaction. Each
person entering into an international transaction must
arrange for an accountant to prepare a report and furnish
it to the tax officer by the due date for filing the corporate
tax return, which is 30 September.
A tax officer may make an adjustment with respect to an
international transaction, if the officer determines that
certain conditions exist, including any of the following:
The price is not at arm’s length
The prescribed documents and information have
not been maintained
The information or data on the basis of which the
price was determined is not reliable
Information or documents requested by the tax
officer have not been furnished Stringent penalties
(up to 2% of transaction value) are imposed for
noncompliance with the procedural requirements
and for understatement of profits.
Other
There is a special tax regime for foreign companies that
are engaged in the business of providing services or
facilities or supplying plant or machinery or hire used in
connection with prospecting, extraction or production of
mineral oils.
Important Note:
The Indian Finance Ministry has proposed to release a
new direct tax code (DTC). The New Direct Tax Code
(DTC) is said to replace the existing Income Tax Act of
1961 in India. During the budget 2010 presentation, the
finance minister Mr. Pranab Mukherjee reiterated his
commitment to bringing into fore the new direct tax code
(DTC) into force from 1st of April, 2011, but same could
not be fulfilled.
Again, as per budget presented on 16th March, 2012,
Implementation of Direct tax code has again been
deferred and won’t be applicable from 1st April,
2012[15].
DOWN STREAM SECTOR: TAXATION SYSTEM
Indirect Taxes
Indirect taxes are applicable to activities that span from
manufacturing to final consumption, and include within
their scope distribution, trading and imports, as well as
services. Therefore, indirect taxes impact almost all
transactions. In India, indirect taxes are multiple, multi-
rate and multi-tier (i.e., levied at the central, state and
local levels). The principal indirect taxes are central
excise, customs duty, service tax, central sales tax and
value-added tax. Additionally, other indirect taxes such
as entry tax and octroi are also levied by state
Governments and municipalities.
Customs Duty
Customs duty is levied on the import of goods into India
and is payable by the importer. The customs duty on
imports comprises the following:
Basic customs duty (BCD)
Additional duty of customs (ADC), levied in lieu of
excise on goods manufactured in India
Special additional duty of customs (SAD), levied in
lieu of VAT on the sale of similar goods in India
Education cess
The rate of customs duty is based on the classification of
imported goods. The classification is aligned to the
Harmonized System of Nomenclature (HSN). The rates of
BCD vary across goods and range from 0% to 10%,
except for certain specified items which attract higher
rates. ADC is levied in lieu of excise duty that applies to
similar goods manufactured in India. It is generally
10.3% (including education cess). SAD is levied in lieu of
central sales tax or VAT payable on the sale of similar
goods at 4%. In addition, education cess at 3% is charged
on the aggregate customs duty.
Thus, the general effective customs duty rate for most
imported goods is 26.85%. Further, certain exemptions or
concessions are provided on the basis of classification,
location or usage of the imported products. In addition,
the Government of India has entered into several free or
preferential trade agreements with trade partners such as
Thailand, Sri Lanka, the South Asian Association for
Regional Cooperation (SAARC) countries, Singapore,
ASEAN and MERCOSUR countries. To promote trade-in
terms, preferential tariff rates have been extended for
certain identified goods traded with these countries.
Similar trade agreements with the European Union
countries and others are also being negotiated currently.
Subject to conditions, an importer using imported goods
in the manufacture of goods may obtain a credit for ADC
and SAD, whereas a service provider using imported
goods may obtain a credit exclusively for ADC.
Notable Issues for the Oil and Gas Sector
Several concessions or exemptions have been provided
for import of goods for specified contracts for exploration,
development and production of petroleum goods. Further,
concessions or exemptions have been provided for the
import of crude and other petroleum products. Further,
import of certain petroleum products also attracts other
customs duties, in addition to the duties discussed above,
such as additional duty on import of motor spirit and
high-speed diesel, and national calamity contingent duty
on import of crude oil.
Key Changes introduced in Budget 2012:
Standard customs duty rates remain unchanged.
Education cess and Secondary & Higher Education
cess is exempt on the additional customs duty on
import of goods.
Import of dredgers is exempt from basic customs
duty and special additional duty of customs.
Natural gas/ Liquefied Natural Gas imported for
power generation by power generation plants is
exempt from basic customs duty.
Exemption is not available to imports by captive
generation plant. Basic customs duty on survey
instruments, 3D modelling software for ore body
simulation cum mine planning and exploration
(geophysics and geochemistry) equipment required for
surveying and prospecting of minerals reduced to 2.5%
subject to specified conditions.
Import of foreign going vessels is exempt from
additional customs duty subject to payment of duty
at the time of its conversion to coastal run and
fulfillment of prescribed conditions
Excise Duty
Excise duty applies to the manufacture of goods in India.
Most products attract a uniform rate of excise duty of
12% and education cessat a rate of 3%. Accordingly, the
effective excise duty rate on most products is 12.3%.
Excise duty is mostly levied as a percentage of the value
of goods sold. However, for certain goods, the excise
duty is on the basis of the maximum retail price, reduced
by a prescribed abatement. The CENVAT credit rules of
2004 allow a manufacturer to obtain and use the credit of
excise duty, ADC, SAD and service tax paid on
procurement of goods and services toward payment of
excise duty on manufactured goods.
Notable issues for the oil and gas sector
No excise duty is levied on domestic production of crude
oil but the same attracts national calamity contingent
duty as well as oil cess. On certain petroleum products,
excise duty is levied both on the basis of value and
quantity. Certain petroleum products also attract other
excise duties such as additional duty (on motor spirit and
high-speed diesel), special additional excise duty (on
motor spirit).
CENVAT credit is not available in respect of excise duty
paid on motor spirit, light diesel oil and high-speed diesel
oil used in the manufacture of goods.
Key Changes from Budget 2012:
The standard rate of excise duty on non-petroleum
products increased from 10% to 12%
Excise duty on Coal remains unchanged to 1%
Cess levied under the Oil Industries Development
Act, 1974 on production of crude oil has been
increased from Rs. 2500/- per metric tonne to Rs.
4500/- per metric tonne. This is effective from 17
March 2012.
Rate of excise duty on avgas has been increased
from 5% to 6%
Service Tax
Service tax is levied on certain identified taxable services
provided in India at the rate of 12%[16] (inclusive of a 3%
education cess). The liability to pay the service tax is on
the service provider, except in the case of a goods
transport agency service or a sponsorship service, where
the liability to pay the service tax rests with the service
recipient. Service tax is applied on the basis of the
destination principle.
Thus, export of services is not subject to tax. On the
other hand, import of services is taxable in India and the
liability to pay the tax is on the recipient of the service
(under the reverse-charge mechanism). Specific rules
have been promulgated to determine the conditions under
which a specific service would qualify as an export or an
import.
Similar to the manufacture of goods, the CENVAT credit
rules allow a service provider to obtain a credit of the
ADC and excise duty paid on the procurement of inputs or
capital goods. Further, service tax paid on the input
services used in rendering output services is also
available as credit toward payment of the output service
tax liability. However, credit of SAD is not available to a
service provider.
Notable Issues for the Oil and Gas Sector
Service tax is levied on services provided in relation to
the mining of minerals, oil and gas and also on the survey
and exploration of minerals, oil and gas. Previously, the
application of service tax extended to the Indian
landmass, territorial waters (up to 12 nautical miles) and
designated coordinates in the Continental Shelf (CS) and
Exclusive Economic Zone (EEZ). Further, there was an
amendment in the law (with effect from 7 July 2009)
whereby the application of service tax was extended to
installations, structures and vessels in the CS and EEZ of
India. Subsequently, a new notification (with effect from
27 February 2010) was issued, superseding an earlier
notification, which stipulates that the service tax
provisions would extend to:
Any service provided in the CS and EEZ of India for
all activities pertaining to construction of
installations, structures and vessels for the
purposes of prospecting or extraction or production
of mineral oil and natural gas and supply thereof.
Any service provided, or to be provided, by or to
installations, structures and vessels (and supply of
goods connected with the said activity) within the
CS and EEZ of India that have been constructed for
the purpose of prospecting or extraction or
production of mineral oil and natural gas and
supply thereof.
VAT or Central Sales Tax (CST)
VAT or CST is levied on the sale of goods. VAT is levied
on sale of goods within a state and CST is levied on a
sale occasioning movement of goods from one state to
another. VAT is levied at two prime rates of 4% and
12.5% (many states have now increased the VAT rates).
However, certain essential items are exempt from VAT.
CST is levied either at the rate of 2% (subject to the
provision of declaration forms prescribed under the CST
Act) or at a rate equivalent to the local VAT rate in the
dispatching state. A VAT or CST registered dealer is
eligible for credit for the VAT paid on the procurement of
goods from within the state and to utilize it toward
payment of the VAT and CST liability on sale of goods
made the dealer, CST paid on procurement of goods from
outside the state is not available as a credit.
Notable Issues for the Oil and Gas Sector
Petroleum products — petrol, diesel, naphtha, aviation
turbine fuel, natural gas etc., — are subject to VAT at
higher rates, which range from 4% to 33%, depending on
the nature of product and the state where they are sold.
VAT credit on petroleum products is generally not
allowed as a credit against output VAT or CST liability,
except in the case of the resale of such products. Since
crude oil has been declared under the CST Act as being
goods of “special importance” in the inter-state trade or
commerce, it cannot be sold at a VAT/ CST rate higher
than 4%.
Goods and Services Tax (GST)
The current scheme of indirect taxes is sought to be
replaced by GST. GST was expected to be introduced
with effect from April 2012. GST is expected to replace
excise duty, service tax on the Centre’s front, VAT at
states end, besides cesses, surcharges and local levies
[17].
In his Union Budget 2012-13 speech finance minister
Pranab Mukherjee said that the Goods and Services tax
(GST) will be operational by August 2012[18].
GST would be a dual GST, consisting of a central GST
and a state GST. The tax would be levied concurrently by
the center as well as the states, i.e., both goods and
services would be subject to concurrent taxation by the
center and the States. An assessee can claim credit of
central GST on inputs and input services and offset it
against output central GST. Similarly, credit of state GST
can be set off against output state GST. However,
specific details regarding the implementation of GST are
still awaited. Some goods, namely crude petroleum,
diesel, petrol, aviation turbine fuel, natural gas and
alcohol are not to come under the purview of the GST.
Thus currently, the inclusion of the petroleum sector
under the GST is not certain since there are varied views
within the Government on the same.
CONCLUSION
In global oil industry, fiscal terms accepted by a country
reflect its negotiating strength and experience of the
country, geological prospects, and the track record of
previous projects. These factors directly influence the
size of the government’s revenue take.
With broad range of fiscal instruments available in the
sector we can say that Indian policymakers have
designed a fiscal regime for oil sector that attracts
investments as well as secure reasonable revenue for the
government. Despite these qualifications, there is dire
need to outline some desirable features to target in the
fiscal regime for the Indian petroleum sector from the
perspective of the multinational oil companies.
One of the factors that had promoted investments in this
sector was a 7 year tax holiday, which currently had a
sunset clause of 31 March 2012. The industry was hoping
that the tax holiday provisions will be extended to help
realize the dream of making ‘India as a refinery hub’, but
no such extension has been done.
During the past 30 years, numerous prospective reserves
for oil and natural gas have been discovered in India. A
growing economy with its inherent increase in energy
demand is likely to welcome huge investment
opportunities in the oil and gas industry. It is expected
that India’s energy sector will provide investment
avenues worth US$ 110 billion-US$ 160 billion over the
next few years. With large areas of India’s sedimentary
basins remaining unexplored, the Indian oil scenario is
believed to comfortably cross expectations. It is high
time since heed be paid towards solving various issues
faced by the industry and also substantially simplify tax
laws in this regard.
Sheetal Saraswat* is a Graduate [B.A, LL.B (Hons.)]
from University of Petroleum & Energy Studies, Dehradun.
She specialises in Energy Laws, especially in Laws
relating to Oil & Gas and Policies thereto.
—-
1. Professor Stephen Smith, “Introduction to key
concepts in the economics of taxation”, UCL
Department of Economics. Retrieved from: http://
www.ucl.ac.uk/~uctpa15/Econ7008_slides1.pdf
.Web. November 3, 2011.
2. “Tax system in India at”, Retrieved from:
www.businessmapsofindia.com , Web. Nov. 5,
2011
3. “Oil and Gas Sector : Overview in India 2009”
KPMG, India
4. Global Oil and Gas Tax Guide: 2011, Ernst & Young,
pg. 173.
5. Nidhi Agarwal, Neetu Vinayak, ”Taxation for the
Exploration & Production Sector, Offshore World,
print Dec’11-Jan’11.
6. “Budget PLUS 2012- Key features of India’s Union
Budget”, Impact on- Oil & Gas Sector, Ernst &
Young, March 19, 2012.
7. Without prejudice to their allowability under
domestic tax laws.
8. Effective date means the date when the contract is
executed by the parties or the date from which the
license is made effective, whichever is later.
9. Mineral oil concerns: (a) Plant used in field
operations (above ground) distribution — returnable
packages (b) Plant used in field operations (below
ground), not including curbside pumps but
including underground tanks and fittings used in
field operations (distribution) by mineral oil
concerns
10. Additional depreciation is permitted for all persons
engaged in the business of manufacturing or
producing any article or thing for new plant and
machinery acquired after 31 March 2005.
11. The rates are further enhanced by the applicable
surcharge and levy.
12. The cost of capital assets is adjusted for inflation
(indexation) to arrive at the indexed cost (the
benefit of indexation is not available to non-
residents), which is allowed as a deduction while
computing the long-term capital gains
13. The rates are further enhanced by the applicable
surcharge and levy.
14. The cost of capital assets is adjusted for inflation
(indexation) to arrive at the indexed cost (the
benefit of indexation is not available to non-
residents), which is allowed as a deduction while
computing the long-term capital gains
15. “Direct Tax Code (DTC): Highlights and Impact”,
Retrieved from: http://www.pankajbatra.com/
india/new-direct-tax-code-dtc-highlights/
16. The peak rate of service tax has been increased to
12% from 10% from 1 April 2012.
17. “Amendment bill on GST unlikely this session”
Retrieved from: http://www[DOT]gst[DOT]co
[DOT]in/ Web. March 11, 2012
18. “Union Budget 2012-13: GST to be operational by
August 2012” The Times of India , Mar 16, 2012,
Retrieved from: http://
articles.timesofindia.indiatimes.com/2012-03-16/
union-budget/31200453_1_gst-council-gst-
dispute-settlement-authority-115th-amendment ,
Web. April 1, 2012