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No tax break for new
July, 15th 2010

The finance ministry appears to have sealed the fate of forthcomingauctions of exploration acreages. The revenue department has rejected the oil ministry's suggestion to extend the seven-year tax holiday under the New Exploration Licensing Policy to gas discoveries in the ninth bidding round.

Revenue secretary Sunil Mitra has written to the petroleum ministry giving basically two grounds for rejection of tax holiday on gas discoveries. First, he says, the Income-Tax Act defines `mineral oil' -- which includes crude -- and `natural gas' as separate products, while the NELP policy has outlined the tax holiday for only oil finds.

Second, Mitra said, the NELP policy has a profit-linked tax deduction structure. Under the circumstance, extending the tax holiday to gas finds from concessions auctioned in the ninth round would defeat the purpose behind the government's efforts to phase out to profit-linked deductions and bring in investment-linked incentives for identifed sectors.

Since both oil and gas have subsurface existence -- and many times is found in the same acreage, the anomaly over their definition in the IT Act had dampened investor sentiment in the eighth round of acreage auction. The anomaly arose after the 2008-09 budget scrapped the tax holiday on natural gas production from auctioned fields.

Following a tepid response in the eighth bid round, the oil ministry took up the issue with the finance ministry which provided relief by extending the incentive to the eight round as a one-time reprieve in 2009-10 budget. But with no similar relief, the ninth round appears to be doomed, particulalry in view of the still-tight global financial position and comparatively low oil prices.

But, Mitra said even the oil finds may not be eligible for 100% profit-linked deduction as production from such concessions will not start before April 1, 2011 from which date the draft direct tax code is to come into play. The new tax code will usher in investment-linked deduction.

Explaining the department's move to usher in investment-linked incentives, Mitra said profit-linked deductions "lead to laundering of profits and transfer of proficts from non-exempt unit to the exempt unit... The finance minister in his Budget speech of 2009 and 2010 has reiterated that profit-linked incentives are inherently inefficient and liable to misuse..."

Both industry and the oil ministry are unlikely to be convinced as explorers do not know for sure whether they would strike commercially viable reserves of oil or gas when they start exploring an acreage. Naturally, keeping gas out of the tax break would make the bidding arithmetic a problem and dampen investor sentiments.

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