Oil cos to remain on MAT: MoF

NEW DELHI, Nov 20:North Block has shot down the Union petroleum ministry's proposal to exempt oil exploration and production companies from...

NEW DELHI, Nov 20:North Block has shot down the Union petroleum ministry’s proposal to exempt oil exploration and production companies from the minimum alternate tax (MAT), once the New Exploration and Licensing Policy (NELP) comes into effect.

Exempting exploration and production (E&P) companies from MAT was part of the six broad recommendations for a new petroleum tax code that the petroleum ministry had forwarded to the Union ministry of finance in June this year. The revenue department, that mulled over the proposals since, consented to accord “infrastructure status” to petroleum companies and all the tariff concessions that go with it, but not exemption from MAT.

The revenue department also turned down a suggestion that multinationals be allowed to pay the same rate of corporate tax as national oil companies, when developing the new exploration blocks. National oil companies now pay 35 per cent corporate tax and transnationals pay roughly 10 per cent more.

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A major tariff concession available in the new petroleum tax code will be import duty exemptions for sub-contractors of E&P companies. Exploration and production companies and their contractors now get some customs duty concessions for importing drilling or exploration equipment, but these reliefs are not passed on to sub-contractors. The much-sought-for tariff concession should bring down costs of oil and gas exploration projects.

Capital goods imports for drilling or oil exploration at present entails a total import duty ceiling of 34.2 per cent, broken up into caps for specified equipment.

The duty concession is available to oil exploration companies like the Oil and Natural Gas Corporation (ONGC), Oil India Limited (OIL) and the private sector Hindustan Oil Exploration Company (HOEC) and their contractors. Since sub-contractors are not eligible for the import duty reliefs, the higher costs entailed in importing equipment for oil wells or pipelines ultimately get passed on to the E & P companies. Oil majors eyeing the 28 onshore and 19 offshore oil blocks that will be put up for bids once the New Exploration and Licensing Policy (NELP) comes into effect, will be spared these additional costs. The NELP is expected to become effective by the end of the year.

Union finance minister P. Chidambaram and Union minister for petroleum and natural gas Janeshwar Mishra approved the new tax code on October 20. The revenue department is expected to codify the “income tax and tariff provisions” for the NELP within the coming fortnight.

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Close on the heels of the tax code will come a model production sharing contract from the petroleum ministry. Sources associated with drafting the NELP say “six weeks from the date of announcement of the petroleum tax code, bids will be invited for the 47 blocks identified for the new exploration policy.” The NELP is really a package of fiscal carrots being dangled before oil exploring companies in the hope of bringing in the much needed investment into developing new hydrocarbon reserves in the country.

Announcing the NELP on Budget day, Union finance minister P. Chidambaram declared a complete exemption from the Rs 900 per tonne cess now levied on crude oil production.

The Centre has also announced a seven-year tax holiday for exploration and production contracts. The petroleum tax code contains the rest of those carrots on offer, intended to attract fresh investment into oil exploration, especially into high-risk ventures like deep sea drilling.