Budget 2015: Oil & Gas Sector expects upstream policy regime to be made investor friendly

By Raju Kumar, Tax Partner, EY India

The new government appears to have been able to reinvigorate the interest of the investors in the India growth story with the slew of progressive policy announcements which seems to be evident in revised GDP growth projections of around 5.5%/5.6% this fiscal year from the below 5% GDP growth witnessed in the previous two fiscal years.

While the 2014 Budget for the oil and gas sector was "directional" in nature, as it did not contain any specific policy & tax level announcements targeted at the oil and gas sector, it is expected that forthcoming Union Budget will give more attention to this sector and should consider the following expectations.

POLICY LEVEL EXPECTATIONS

Though there have been draft policies for public discussion around shale gas, CBM, new contract model for PSCs, which is pending finalisation. In addition to finalisation of such policies, the following aspects should be looked at:

1. Upstream policy regime should be made investor friendly, given the quantum of investments required to enhance domestic production to potentially achieve self- dependence in the sector.

2. State participation in major discoveries in deep water region should be considered to ensure that inputs of the national oil companies on costs and operations can be taken.

3. Need for a clear policy framework with time bound approval process for conducting exploration & production (E&P) operations, which should also involve expediting pending Ministry of Environment and Forests (MoEF) / Ministry of Defence (MoD) clearances for existing blocks. Also, the government could look to operationalise Open Acreage Licensing policy (OALP) which could enable bidders to bid for blocks on offer at any time of the year.

4. Clarity is required on bidding framework for transmission pipelines and city gas distribution projects to ensure timely implementation of gas infrastructure in the country.

6. The conventional E&P blocks which are already awarded to various entities if found to have other reserves like CBM or shale gas resource, may be allowed to be exploited by the same lessee/contractor on a right of first refusal basis, instead of excluding such area to be offered for shale oil/ gas/CBM exploration.

TAX LEVEL EXPECTATIONS

Looking at the quantum of investments involved in this sector and tax revenue it generates for the, Government, tax benefits, concessions and clarifications would play a key role in attracting the investments further. The following measures could be considered:

Tax regime for upstream activities

1. Deductibility of drilling and exploration activities undertaken with respect to overseas block held directly by an Indian company should be clarified, by not restricting the expenditure to be in pursuant to an agreement entered only with the Central Government of India. This will provide a great relief and will further encourage Indian oil & gas companies to acquire assets abroad.

2. The condition of 'surrender' of area should be deleted, which will encourage exploration companies to fully explore the areas.

Tax holiday

3. Applicability of tax holiday provisions on production of 'natural gas' should be expressly clarified, which will put a stop on any frivolous litigation and will also be helpful in making the right tax assumptions for the purpose of preparation of financial models, as the industry gears up for NELP - X bidding round.

4. Eligibility period & flexibility for claim of tax holiday on oil & gas sector should be extended and aligned with the infrastructure sector, which provides for a tax holiday period of 10 consecutive years and there is a flexibility of choosing this period in a block of 15 years. This will help in balancing the flow of actually benefiting from tax holiday provisions for upstream companies.

Presumption taxation regime

5. With an objective to restore the settled tax position and the interest from foreign reputed oil & gas service providers, continuation of presumptive taxation regime (i.e. an effective tax rate of 4% plus applicable surcharge and education cess) for technical assistance provided by foreign oil & gas service providers should be expressly clarified. This will also help in making correct assumptions on the tax rate, as applicable for foreign oil & gas service providers, thereby not leading to an increase in the cost of exploration activity.

Investment linked incentive

6. As the current provisions only cover 'cross country pipelines' and given the fact, that India needs strong gas infrastructure, it is expected that the benefit of this incentive should also be extended to inter-state and intra-city gas distribution networks, by including the same within 'specified businesses' category.

Indirect tax

7. Service tax exemption on laying of gas pipeline network to align it with the status of other infrastructure development projects like building roads, railways etc.

8. Natural gas should be added to the list of declared, on which VAT in excess of 5% cannot be charged by State Governments. Since crude oil and coal are also a part of this list, it appears unjust that natural gas is subject to VAT rates as high as 26%.

To conclude, as India is not blessed with bountiful hydrocarbon resources that can lure explorers, it becomes imperative to have a non- adversarial policy regime and beneficial tax regime to attract investment and to take care of the country's energy needs, thereby cutting down on the import dependence.

(Vaibhav Luthra, senior tax professional, EY contributed to the article)

(Views expressed are personal)