India’s offer of 34 oil and gas blocks may come unstuck as no tax

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sops have been announced for the ni­nth round of auction under New Exploration and Licensing Policy (Nelp). The offer will open on the coming Friday.

Finance ministry’s rejection to offer seven-year tax holiday to companies that will explore these oil and gas blocks will make it an unattractive preposition for international oil companies, an oil ministry official said on condition of anonymity.

Already, international road shows to hardsell the exploratory blocks are in progress across US and Europe.

Experts feel that a tax concession based on investment rather than profit will help woo more investors. Bids for the eight deepwater blocks, seven shallow water blocks, and nineteen onland blocks will open on October 15. The blocks are spread over 88,807 square kilometres.

“They (government) may look at some kind of tax protection for the companies. Unlike previous regime, it may be based on investments poured in by the companies and not necessarily related to profits,” said Arvind Mahajan, executive director and head of energy and natural resources at KPMG Advisory Services in Mumbai.

It is very difficult for foreign investors to take a call while factoring in their investments if there is no clarity on tax regime, indicated Dilip Khanna, partner at Ernst & Young's oil & gas practice.

“There are different bidding parameters. For instance, there are incentives based on completion of minimum work programme. We are yet to see if government will offer any tax sops in the new round,” Khanna explained.

In addition, it is important to see whether both gas and oil will attract similar incentives, added Mahajan at KPMG Advisory. At the moment, there is no clarity if direct tax code is implemented, he said.

“There will be no seven-year tax holiday in the ninth round of Nelp. Moreover, direct tax code will be applicable. However, oil ministry is discussing with finance ministry on possible tax concession that will be beneficial to investors,” a senior official at oil regulator directorate general of hydrocarbons (DGH) told Financial Chronicle.

Under the proposed Direct Tax Code (DTC), all profit-linked tax deductions to industries, including the hydrocarbon sector, available according to Section 80 IB (9) of Income Tax Act will be withdrawn. DTC is expected to become operative beginning April 1 next year in case Parliament adopts it before the due date.

The draft DTC bill does not make a specific provision regarding cut-off date for incentives applicable to oil and gas exploration. The discussion paper on DTC had stated, “The provisions of Income Tax Act, 1961 that allow profit-linked incentives and other tax incentives contrary to the new scheme contained in the code will be grand-fathered.”

Petroleum minister Murli Deora at an interaction with investors in London last Friday did not say much about tax concessions and only said, “In the upstream sector, the regular conduct of Nelp bid rounds has resulted in securing investment of about $14 billion. During last year, a commitment of $1.1 billion was obtained,” Deora told investors.

Revenue secretary Sunil Mitra is said to have conveyed to petroleum secretary S Sundareshan that ninth round of auction under Nelp will not bear a seven-year tax holiday.

Finance ministry has cited that no incentives are given to explorers in US, UK and 70 other countries. On the other hand, companies attract a special impost on windfall profits.