Home > Crude Oil & Petroleum, Natural Gas, Uncategorized > Will new tax regime benefit investments in oil & gas sector in India?

Will new tax regime benefit investments in oil & gas sector in India?

Replacing the existing regime of seven-year tax holiday on profits on sale of oil from the oil blocks offered under NELP, energy explorers will get tax incentives based on investments in the ninth round of auctions for oil and gas exploration blocks. The tax benefits will extend to gas exploration as well.

Will this move refrain bidders?

Deduction that was available for commercial production of mineral oil will not be available for blocks licensed under a contract awarded after March 31, 2011 under the New Exploration Licensing Policy (NELP) announced by the Government of India.

In order to explore and develop the country’s oil and gas reserves, the government devised the NELP scheme, which came into effect in 1997-98. It aimed to provide equal opportunities to all interested parties to compete on equal terms for the award of oil and gas exploration blocks. Under the scheme, the successful bidder is required to enter into a production sharing contract with the government.

In eight rounds of NELP since 1999, up to 235 blocks have been awarded, resulting in enhancement of exploration coverage from 11% to about 58% of the Indian sedimentary basin between 2000 and 2010.

Blocks on offer under NELP IX

Up to 34 exploration blocks are on offer for bidding in NELP-IX Licensing Round, which are categorised as:

  • 8 blocks in deep water
  • 7 in shallow water
  • 19 onshore

Of these 11 blocks are located off the western coast, four of these in deep water. Another four deep water blocks are available to the east of the Andaman & Nicobar Islands. The remaining blocks are located onshore.

One of the features of NELP includes income tax holiday for seven years from start of commercial production. However, certain oil blocks were unable to yield the desired quantity of crude oil, thereby making it commercially unviable. It never led to profit due to which companies wouldn’t be eligible for the tax incentives and it led to wasteful investment spending. Hence, the government has altered the incentive pattern from being profit centric to being investment centric, wherein incentive is given on amount of investment made in exploration on these oil blocks.

Oil secretary S Sundareshan said the new tax incentive regime is based on the proposed direct tax code set to replace the existing income tax laws from 2012. However, investors claim that ambiguity exists on the issue.

While NELP has been implemented for a decade, India is still import dependent for its crude oil needs. Also, it is observed that a number of global exploration companies have refrained from developing these blocks. Some attribute this to the low crude producing oil blocks offered by the government under NELP rounds. Also, under the current income tax laws, definition of mineral oil does not include natural gas, which is another deterrent.

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