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I-T stand on tax sop may hit Nelp VII
May, 02nd 2008

Dept files petition against tribunal's decision categorising gas as mineral oil.
The auction of oil and gas blocks under the seventh round of the National Exploration and Licensing Policy (Nelp VII) is likely to face a second delay with the Income-Tax (I-T) Department filing a petition in the Gujarat High Court against a decision by the Income Tax Appellate Tribunal to include gas in the definition of mineral oil, making it eligible for an income tax holiday.

The tribunal had announced this on March 29 on an appeal by Canadian company Niko Resources, which owns 10 per cent in Reliance Industries' block in the Krishna-Godavari basin, from where gas production is likely to start later this year.

Companies producing oil and gas have been eligible for an income tax holiday for seven consecutive assessment years since 1997. This was modified in Budget 2008-09 to exclude gas production after the finance ministry clarified that the ministry's intention had been to extend the tax holiday only for oil production and not gas.

The confusion over the tax holiday has been cited by the petroleum ministry as the reason Nelp VII, in which the government hopes to attract investments worth $3.5 billion, was delayed from April 25 to May 16.

Oil ministry officials say Nelp VII is likely to be delayed again as major companies, including foreign ones, are not willing to bid until the confusion over the definition of mineral oil is sorted out.

"We have been promising the tax holiday in all Nelp rounds. Besides this being an embarrassing situation, gas production cannot be differentiated from production of oil," said a senior oil ministry official.

On Tuesday, Finance Minister P Chidambaram told Parliament that the final decision on the eligibility of gas production for an income tax holiday would rest with various courts and tribunals hearing the issue.

Budget 2008-09 documents show that the government had foregone Rs 6,835 crore in 2007-08 as a result of the tax holiday on mineral oil production, the third largest item on the list. Experts say this figure is likely to go up to Rs 15,000 crore in the next three years.

"At a time India is not being seen by global investors as a prospective oil and gas reserve country, the tax holiday withdrawal will keep everyone away," said an industry expert.

"Even if the concession is withdrawn, we should be given a clear picture," said a senior official with an oil and gas producing company.

He added his company was already preparing two bid proposals one with a tax holiday and another without a tax holiday.

The first six rounds of Nelp, starting 1999, have not attracted as much foreign investment as the government had hoped as none of the global oil majors bid despite the tax break.

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