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Tax exemption on gas output unlikely soon
February, 03rd 2009

Energy firms may have to wait a little longer to avail a seven-year tax holiday on natural gas production. The Income-Tax department
is unwilling to allow tax benefit on production of natural gas as the matter is sub judice.

Companies producing crude oil, however, enjoy the tax incentive.

The issue is sub judice and it would only be appropriate to allow the courts to resolve this issue, a government official said, quoting a statement of the finance ministry. "This has been abundantly clarified by the finance minister in his reply to the debate on the Finance Bill, 2008 in the Lok Sabha," the statement, issued on July 1, 2008, said.

Petroleum minister Murli Deora had said on Sunday the government was considering a proposal to grant the tax incentive to companies engaged in production of natural gas in India.

At the time of inviting bids for exploration blocks under the seventh round of new exploration licensing policy (Nelp-VII) in June 2008, petroleum ministry had warned investors. "The ministry of finance has clarified that income tax relief of seven years will be available only on commercial production of 'crude oil'. In the light of the above clarification, IT-related provisions in the notice inviting offer (NIO) and petroleum tax guide issued by this ministry for the Nelp-VII bidding round may be read accordingly. The ministry has clarified that all the potential bidders may submit their bids under Nelp-VII, keeping the above clarification in mind."

Under the Nelp and coal bed methane policy, the ministry had been assuring potential bidders of income tax rebate for a seven year period from the beginning of commercial production.

The controversy over taxation issue under Nelp regime started after the Finance Bill 2008-09 proposed to include a new definition of mineral oil in the section 80-IB(9). Accordingly, the Budget memorandum said, "the term 'mineral oil' does not include petroleum and natural gas." The move would have a direct bearing on explorers like RIL, Niko and ONGC who have made gas discoveries in KG and Mahanadi basins.

Later finance ministry withdrew the definition of 'mineral oil' for the purpose of section 80-IB(9) stating that the proposed change in the bill was aimed at clearing the ambiguity as different tax tribunals had taken varied positions on the issue.

But situation didn't change even after this. The current provision provides for tax holiday only to exploration of crude oil and not of natural gas.

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