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BP castigates Fin Min on tax breaks for NELP blocks
June, 30th 2008

 British Petroleum has castigated Finance Ministry for not keeping its commitment of giving tax breaks to both oil and gas production saying the move will harm India's brand as an investor friendly country.

Though the Cabinet had guaranteed exemption from payment of income tax on oil and gas production from areas awarded under New Exploration Licensing Policy, the Finance Ministry is of the view the fiscal incentive are only meant for oil.

"The provision of a tax holiday is a key fiscal incentive to attract investors to explore in high risk areas in the Indian basins. Any decision on the withdrawal of such incentive would send conflicting signals to investors," BP Group Managing Director and Chief Executive Iain Conn wrote to Petroleum Minister Murli Deora.

Bids for 57 blocks on offer in the seventh international auction round under NELP are due on June 30 and Petroleum Ministry fears 'poor response' in view of the tax controversy.

Finance Ministry believes that the term mineral oil for the purpose of giving tax holidays includes production of only crude oil but it choose to ignore the fact that same tax incentives under the same act have been promised to producers of gas from below the coal seams (coal bed methane) where no oil can ever occur.

"It (withdrawal of tax breaks) also has the potential to harm India's brand as an investor-friendly country if this was to be applied retrospectively to blocks which were entered into on the basis of a 7-year tax holiday being granted," he wrote.

Finance Minister P Chidambaram announced his version of the tax breaks in his Budget speech for 2008-09 and wants to apply it all areas awarded since 1999.

BP was awarded a CBM block in West Bengal in the third round of bidding for CBM blocks through a competitive bidding process.

"BP was encouraged by the terms of the CBM round and in particular considered the 7-year tax holiday as a favourable basis on which to submit a bid," BP's South Asia Exploration Director Jonathan Evans wrote in a separate letter.

Pointing that BP participated in NELP-V and VI bid rounds and was evaluating bidding in NELP-VII, Conn wrote that it was imperative that the provision of 7-year tax holiday from the date of commercial production of natural gas is restored.

Deora has also written to Prime Minister Manmohan Singh seeking his intervention on the issue but there has been no clarification from the Finance Ministry so far.

He cited several definitions world over, and those in the Mines Act of 1952, Mines and Minerals (Development and Regulation) Act of 1957, Petroleum and Natural Gas Rules of 1959 and Oil Industry (Development) Act of 1974 to state that mineral oil contains both oil and gas.

"The Income Tax holiday (should be) applicable for both oil and gas exploration, especially because at the exploration stage it is impossible to anticipate whether the exploration activity would lead to oil or gas discovery," he wrote.

Any denial of fiscal incentives promised earlier due to an ambiguity in interpretation will result in a huge embarrassment to the government and will mean a major reversal of our economic liberalisation programme, he said.

"The immediate upshot of the imbroglio will be on the quality of bids that are about to be received under the ongoing NELP-VII round," he added.

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