The government will lose Rs 40,000 crore in revenues if natural gas production is given tax breaks, the revenue department in the Finance Ministry has opined, an assessment disputed by experts.

Revenue Secretary P V Bidhe met Petroleum Minister Murli Deora on May 29 and is believed to have expressed reservation on grant of seven-year exemption from payment of income tax to natural gas production, a senior government official said.

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 last year said the fiscal incentive are only meant for oil.

This stand, which ran contrary to the government's written commitment while attracting investment under NELP since 1999, led to a damp squib response to last auction round and has led to postponement of current round.

The official said Bhide had opined that tax breaks to companies like Reliance Industries (RIL), whose gas find will double India's natural gas output, will lead to Rs 40,000 crore loss in tax revenues.

Industry experts, however, said the figure was highly inflated pointing that income tax liability for companies like RIL will set in only after investments are recovered which may take a minimum of four years.

For the remaining three (out of the seven-year tax breaks) would yield about $1.5 billion in income tax on a total estimated revenue of $4.5 billion.

Last year, international energy giants like BP Plc had decried the 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.

The 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.

The withdrawal of tax breaks also has the potential to harm India's brand as an investor-friendly country. The then Finance Minister P Chidambaram announced his version of the tax breaks in his Budget speech for 2008-09 and wants to apply it in all areas awarded since 1999.

Petroleum Minister Murli Deora too had 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.