The finance ministry will not give seven-year tax holiday to oil and gas exploration

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blocks to be awarded under the ninth round of new exploration licensing policy or NELP. The move may dampen companies’ interest in new Indian oil and gas assets.

Revenue secretary Sunil Mitra is said to have conveyed the decision to petroleum secretary S Sundareshan last week.

“We have told the petroleum ministry that they should not expect tax benefits for exploration and production companies in the ninth round. We were to withdraw these benefits last time itself,” a top revenue department official told Financial Chronicle on condition of anonymity.

Under proposed Direct Tax Code (DTC), all profit-linked tax deductions to industries, including the hydrocarbon sector, available as per section 80 IB (9) of Income Tax Act will be withdrawn.

Bidding for 30-40 blocks under NELP-9 will begin by the end of the year, after roadshows in India and abroad. Blocks are likely to be awarded by January 2011.

Blocks in the ninth round will not get tax incentives irrespective of whether DTC is introduced in April 1, 2011, or not. Issues raised by state governments and the empowered committee of finance ministers headed by Asim Das Gupta may delay the introduction of DTC.

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

However, Mitra has apparently assured that they would look for a way to continue the seven-year tax holiday for oil blocks for which production sharing contracts are in place.

“Grandfathering these tax incentives and deductions under DTC is possible though the draft code does not make a specific provision as on date,” the revenue department official said.

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 grandfathered.”

Sundareshan had sent a three-page letter to Mitra on August 9, 2010 requesting continuation of tax holiday for oil and gas blocks under the ninth round in addition to grandfathering these incentives for existing blocks.

India did not receive good response in 2009 when it offered oil and gas blocks under the last round of NELP and coal bed methane bidding. Of the 70 blocks it offered under the eighth round of NELP, only 36 attracted bids.

Most global oil majors such as ExxonMobil, Chevron, Shell and BP did not participate in the previous round of bidding. While state-run ONGC was a front-runner for the blocks last time, Reliance Industries, controlled by Mukesh Ambani, did not bid for any block.

While global financial turmoil was cited as a reason for the poor response to the eighth round, bidding under NELP-9 has been postponed by six months due to euro zone crisis.

Finance minister Pranab Mukherjee gave seven-year tax holiday to bidders in the eighth round following intervention by prime minister Manmohan Singh.

The planning commission did not take any decision last month even though the mid-term appraisal chaired by the prime minister had considered measures including continuation of tax benefits to the hydrocarbon industry under NELP-9.

Petroleum minister Murli Deora had told Parliament in December 2009 that, so far, 73 discoveries had been made in 21 blocks under the NELP regime. A reserve of 642 million tonnes of oil and oil-equivalent gas has been established from them.