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Tax incentives unwarranted further
June, 12th 2009

There's needless controversy over tax liability in the upstream hydrocarbon sector, specifically relating to natural gas production. The extant fiscal regime as per the new exploration licensing policy does provide generous tax benefits to shore up investment in the high-risk exploration and production (E&P) segment. The issue now is whether a further tax incentive is warranted, so as to make corporate income from gas production tax exempt. Note that the budget last year did provide for a tax holiday on crude oil production.

Extending the tax exemption to gas would be logical, its argued. But two wrongs do not make a right. Theres simply no case for corporate tax exemption for gas production. Gas prices for the new hydrocarbon finds in the Krishna-Godavari basin are now market-determined, and theres no reason why income tax liability ought to be absolved. Theres also a sound case for phasing out the income tax holiday on oil production.

Whats surely required is a reasonable tax structure across the board in the oil & gas sector. Instead, we have perversely opted for generous tax holidays for oil refining, which is now proposed to be extended to hydrocarbon production.

We clearly need to rationalise both direct and indirect taxes in petroleum. The move to provide income tax holiday for gas production needs to be nipped in the bud. Anyway, the attendant provisions in the licensing policy do provide for tax deductions of E&P expenses and costs, which are as per global best practices. The budget last year did extend the tax holiday for oil refineries up to 2012, but we need to do away with such give-aways.

It makes no sense to prop up capital-intensive refineries with huge tax benefits. In the nineties, capital goods imports for refineries were also made duty free. As for petro-products, indirect taxes can add up to half the retail price which is perverse incentive to adulterate fuel. Thankfully, the indirect levies were reduced last year on an ad-hoc basis given the sharp spurt in global crude prices. We do need to firm up a rational tax policy in oil & gas without further delay.

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