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Budget may see big-ticket tax relief for oil explorers, refiners
December, 31st 2007
The oil sector may get substantial tax breaks in the 2008 Budget. While exploration firms are likely to be exempted from service tax, refiners may gain from an excise duty rejig. The government is considering removing the ad-valorem component and adjusting the specific component in such a way that the effective excise duty on both petrol and diesel would be reduced by Rs 2 per litre.

The contribution of service tax by exploration & production (E&P) sector is not significant. E&P activities are being encouraged for the countrys oil security. The sector enjoys complete exemption from Customs and excise duties under the new exploration licensing policy (Nelp). Hence there is a strong case for exempting exploration activities from the ambit of service tax, an official said.

Petroleum sectors service tax contribution to the Central exchequer is stated to be Rs 666 crore. Mining services (including mining of mineral oil or gas) was brought under the service tax net from June 1, 2007 through the Finance Act 2007. E&P companies like ONGC, Reliance Industries, Cairn India, GSPC and OIL are under pressure due to rising input costs.

On the refining front, the government is considering an excise duty rejig that would cost the central exchequer Rs 13,500 crore. The decision in this regard could be taken even before the Budget as the government is considering a combination of measures to save oil companies from massive under-recoveries, an official said.

Sources said the petroleum minister has initiated a dialogue with the UPAs allies to reach a consensus on marginal increase in retail price of auto fuel. The government intends to increase prices of petrol and diesel marginally and compensate oil companies by reducing duties.

The estimated under-recoveries by oilcos on account of keeping prices of petrol and diesel artificially low in 2007-08 is Rs 26,777 crore. Total under-recoveries are projected at Rs 54,935 crore.

Finance ministry sources said the government is also considering a proposal to treat the oil & gas sector at par with power sector for availing of the benefits under section 80IB (9) of Income Tax Act.

The power sector has been granted an income tax holiday for undertaking generation & distribution activities for a period of any 10 consecutive years out of 15 years beginning with the year in which the company starts generation or distribution of power.

Oilcos, however, receive such a benefit only for a period of seven consecutive assessment years including the initial assessment year. These companies are, however, unable to avail of this benefit for the full tenure owing to depreciation claims in the initial years.
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