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No profit-linked tax breaks will be available in the ninth auction
October, 01st 2010

The petroleum ministry has amended the terms of licensing oil and gas blocks to companies so that the provisions of the direct tax code 2010 will apply to companies winning them in the next auction of blocks to be launched on October 15.

The ministry will soon clarify to potential bidders that no profit-linked tax breaks will be available to bidders in the ninth auction of blocks under the new exploration licensing policy (Nelp 9). The 7-year tax free profit that is now available to the Nelp 8 and coal bed methane (CBM 4) blocks will be available for their unused period and will be grandfathered. New investors will only get investment linked deductions for calculating taxable income.

The ministry has amended the model production sharing contract (PSC), which winning bidders have to sign with the government, to specify that whatever tax regime comes into force from time to time, will be applicable to oil and gas producers.

This puts to rest the hopes that the finance ministry may allow seven-year tax free profits to those who produce oil and gas from the Nelp 9 blocks considering that the global investors are now moving away from risky assets.

Some experts even speculated that if the government launches Nelp 9 and contracts are signed before the DTC comes into force, these blocks may be eligible for profit-linked deduction.

About 35 blocks, nearly half of it offshore fields, will be offered to oil and gas explorers in Nelp 9 auctions, which is being launched on October 15.

The amendment to the PSC would ensure that instead of the profit linked deduction on the taxable income that is now available to crude oil and gas produced from Nelp 8 and CBM4 blocks, investment-linked deduction would be applicable on the blocks that are licensed out under Nelp 9 and CBM5, a source said Media.

The direct tax code 2010 proposed to replace profit-linked incentives with investment-linked incentives. Schedule 11 of the Code allows capital expenditure incurred by oil and gas explorers as a deduction from the gross income while calculating taxable profits.

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