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Rationalise indirect tax
June, 26th 2009

Budget wish-lists are flowing into the Finance Ministers office from various industries all over the country. With well justified reasons, the Oil & Gas sector is not lagging behind. Despite, being one of the largest contributors to the Public Exchequers kitty, this sector seems to have been deprived of its share of the pie.

The Finance Ministers 2008 Budget speech, referring to exclusion of natural gas from the term mineral oil, regardless of specific tax holiday commitments in the Production Sharing Contracts, has not been taken well by the Exploration and Production (E&P) players.

This has led the matter to end-less years of litigation, which in turn has taken its toll on the response to the recent New Exploration Licensing Policy (NELP) bidding rounds. However, indications by the Government on reconsidering the issue have stirred a new ray of hope and the industry is eagerly awaiting a resolution on the matter.

Closely linked to this, is the issue of claiming the tax holiday for a period of 7 years, starting from the commencement of the commercial production. Practically, due to substantial initial costs and existing framework of the tax provisions, E&P players are hardly ever able to claim the tax holiday for the entire duration. Flexibility in the period of claiming the tax holiday, similar to the infrastructure sectors like power, road, ports and so on, would help industry players enjoy the true benefits of the tax holiday provisions.

The Governments effort to reduce the cascading effect of indirect tax levies by introducing a mechanism of cross-credit between service tax and excise duty (CENVAT) is commendable. However, E&P players are unable to fully benefit from this system.

While, E&P companies are paying input service tax, they have no output service tax or excise duty liability against which, they can claim credit. Some of them are even paying crude oil cess which, although, being a federal indirect tax levy, is not cenvatable. This results in undue tax costs for these companies. Means to address such leakage either by elimination of service tax or cenvatability of crude oil cess would definitely reduce the ever-increasing cost burden of E&P players.

It is strongly believed that natural gas is fast becoming the fuel of the future because of its clean, abundantly available and cost competitive nature. In this background, enough representation has been made to the Government to provide fiscal stimulus for the development of natural gas by granting it declared goods status, but without success.

In the absence of such a status, natural gas, unlike its peers, coal and crude oil, is subject to high and multi-point sales tax, touching as high as 20 percent in some states and ranging from 8 to 12.5 percent in others. The declared goods status would ensure that it attracts a uniform state sales tax not exceeding 4 percent providing natural gas a more competitive edge in the energy segment.

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