The Telegraph
Monday , July 7 , 2014
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Oil players seek end of service tax

New Delhi, July 6: Oil and gas exploration could get a boost in the budget with finance minister Arun Jaitley likely to address the concerns of the sector regarding service tax.

Oil ministry officials said they were hopeful that the exploration and production (E&P) companies could get some relief as the Modi government was keen on attracting investments, which would reduce the import bill.

Companies such as Reliance Industries, Cairn India and ONGC have sought a review of the service tax and suggested that either it should be refunded or exempted.

“The exploration business by its very nature, is highly capital intensive, has a long-gestation period and, above all, is highly risky. Levying service tax on exploration activities especially at a time there is no surety whether hydrocarbons will be discovered; and if discovered, whether the same will be commercially recoverable, is uncalled for,” the industry players said in their representation to the finance ministry.

The government should formulate a scheme to refund the tax paid by the explorers on services utilised during exploration and production. Alternatively, services provided to the explorers may be “zero rated” (exempted from tax) so that there is no stranding of taxes at the hands of service providers, industry association Ficci said in its pre-budget memorandum.

“In order to attract investment into the sector and achieve uninterrupted growth, it is imperative for the new government to address some of the key tax issues, which are specific to the oil exploration and production industry and remain unaddressed till date,” said Raju Kumar, tax partner, E&Y.

The government has committed itself to exempt from taxation the activities under Nelp (New Exploration Licensing Policy) to ensure that the entire expenditure incurred by the successful bidders goes towards exploration and production and not towards taxes.

In line with this commitment, the government has issued appropriate exemption notifications under customs, exempting specified goods imported for petroleum operations from duty.

Similarly, goods that could be imported at “nil” rates of customs duty for petroleum operations could also be purchased from indigenous manufacturers through international competitive bidding (ICB) at zero excise duty.

The indigenous manufacturer supplying the goods against ICB is entitled to full credit of Cenvat on inputs used in relation to the manufacture of the goods supplied against ICB for petroleum operations. Thus, there are no stranded taxes both in the case of imported and indigenous goods.

However the current policy, subjecting the services consumed by the explorers to tax, drains away a substantial part of the funds committed for exploration.

The Nelp policy, which was approved in 1997, took effect in January 1999 to boost hydrocarbon exploration.

Investor interest in the country’s E&P sector has been waning even though around 70 per cent of Indian basins remain largely under-explored. This has been attributed to various issues, including taxation.