The petroleum ministry has said that the income tax holiday of gas production would not be available to oil companies bidding for blocks under the seventh round of the New Exploration Licensing Policy (Nelp VII), which closes on Monday.

"It is clarified that as advised by the ministry of finance, income tax holiday will as of now be available for commercial production of crude oil only," the petroleum ministry said in a statement.

The petroleum ministry has so far awarded 162 blocks in six rounds of Nelp since 1999. While marketing each auction, including Nelp VII, the ministry has been promising a seven-year income tax holiday once the companies begin producing oil or gas from the blocks they win under Nelp.

In the 2008-09 Budget, Finance Minister P Chidambaram had however withdrawn the tax holiday for gas production, but said oil production would continue to get the benefit. He later added that the decision of the various courts and tribunals hearing the matter would prevail. The Income Tax Appellate Tribunal at Ahemdabad and the Allahabad High Court is hearing the case.

The petroleum ministry has however told the finance ministry that the tax holiday should be allowed as companies drilling in blocks do not know whether they'll find oil and gas. "Also oil and gas occur together in most cases. Then how does one separate the two for paying taxes," wondered a petroleum ministry official.

The issue was referred to the law ministry in May this year.

Oil companies have however been confused as to how to structure their bids for blocks under Nelp VII in the absence of clarity on the issue.

The petroleum ministry went into a huddle on Friday, the last working day before the bidding closes, attempting to settle the tax holiday issue. "We were expecting a clarification from the finance ministry two days back. However, nothing has come," a senior petroleum ministry official said.

The bid deadline has already been postponed three times because of lack of clarity on the issue.

Reliance Industries, which won seven blocks out of the 55 that were offered in Nelp VI, were preparing bids with both scenarios in mind – with a tax holiday and without a tax holiday. Other companies such as the government-owned Oil India were structuring their bids without accounting for a tax holiday.