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The Indian budget and its effect on oil and gas

Oilfield Technology,

The Indian Finance Minister, in his first budget announced last week, has expressed the new government’s intention to accelerate production and exploration of coal bed methane reserves. It will also explore the possibility of using modern technology to revive old or closed wells.

The Finance Minister has proposed to develop an additional 15 000 km of gas pipeline systems to complete the gas grid across India using public-private partnership models. According to Sanjay Grover of EY these measures are expected to boost production and usage of mineral oil and gas.

Income tax

Grover suggests that a couple of issues affecting the oil and gas industry required clarification such as applicability of tax holiday and applicability of presumptive taxation regime for technical assistance by foreign players. However, though there were generic tax reforms that will impact the industry, industry specific reforms were omitted.

In addition to depreciation and existing investment allowance of 15%, manufacturers will be able to avail a similar additional investment allowance with a lower threshold from 1 April 2014 to 31 March 2017. This deduction will be available on a year on year basis till 31 March 2017.

Another benefit that has been proposed is extension of concessional tax rate of 15% on dividends received by Indian companies from its subsidiary foreign company indefinitely. Also, the 5% concessional withholding tax on interest payments by an Indian company on issue of long-term infrastructure bonds has been extended to any long-term bond.

Although not proposed as a part of the legislation, the Finance Minister has additionally expressed the following to achieve a stable tax regime:

  • No retrospective amendments to be introduced which create a fresh liability.
  • High Level Committee to be constituted to scrutinise fresh cases falling under the retrospective amendment relating to taxability of indirect transfer.
  • Advance ruling mechanism to be extended to resident taxpayers.
  • Scope of income tax settlement commission to be enlarged.

Indirect tax

According to Grover, specific excise and custom duty rates have been rationalised for coal and branded petrol.

Welcome retrospective amendment is customs duty exemption on mineral oil produced in continental shelf/exclusive economic zone and imported prior to 7 February 2002. Similarly, basic customs duty has been exempted retrospectively on liquefied propane/butane and LPG imported by IOCL, HPCL, or BPCL for specified supplies.

It has been clarified that exemption available for supplies against International Competitive Bidding also extends to sub-contractors for manufacture and supply of goods on behalf of the main contractor.

However, there has additionally been a substantial increase in service tax interest rates from 18 to 30%. Other severe measures include restriction on the period for claiming central value added tax (cenvat) credit to just 6 months and amendment of (cenvat) rules to disallow transfer of credit by a large tax payer (LTU).

Adapted from an opinion piece by Emma McAleavey.

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