FinMin rejects oil ministry proposal, says no ‘double benefits’ for explorers

OilMin had asked for tax holiday for offshore blocks or exemption from royalty payments

India’s next offer of oil and gas blocks for exploration has run into rough weather with the finance ministry declining the petroleum ministry’s request for re-introducing the seven-year tax holiday for offshore blocks or exempting the explorers from paying cess and royalty.

While commenting on the provisions for the proposed Uniform Licensing Policy (ULP), planned to replace the much-criticised New Exploration Licensing Policy (NELP), the finance ministry was categorical that “double benefits for all offshore blocks by means of a tax holiday and zero per cent royalty is not supported.

“A graded system based on the difficulty of the block and the expected investment either by a tax holiday (of varying period) or reduced royalty (of varying amounts) could be considered for different types of onshore and offshore blocks,” it said in its comments to the draft Cabinet proposal to introduce ULP. “The exemption from levy of cess on crude oil may not be desirable as the cess so collected will ultimately be used for the development of the oil and gas sector and it is essential that the same is collected across all the players in the same industry to maintain parity,” it added. Reforms could be ushered in India’s hunt for oil & gas on high seas with exemption from paying royalty, re-introduction of income tax holiday with an extra 3 years for blocks in ultra-deep and frontier areas.

The Oil ministry’s proposal — borrowing from Rangarajan Committee report — had proposed introducing simplicity and incentivising exploration through exemption from royalty payment for offshore blocks, replacing the existing 10 per cent royalty on shallow water and 5 per cent in the first 7 years and 10 per cent thereafter for deep water blocks.

The ULP also planned to bring back the 7-year income tax holiday that was available for all blocks awarded before March 2011, but was stopped by the Finance Bill, 2011.

And for blocks falling under new, difficult, ultra deepwater and in frontier areas, the period of tax holiday was proposed for 10 years.

But the finance ministry refuted the re-introduction of tax holiday saying that the scheme was done away with through Finance Bill “keeping in view the fact that tax benefits are not given in perpetuity” and tax holidays are given “to promote a particular sector only in its nascent stage”.

“Further, it has been the considered policy of the government to phase out profit-linked deductions as they are distortionary, iniquitous, lead to increase in compliance cost and administrative burden, and are liable to abuse. Therefore, there is no scope for extension of any profit-linked deduction,” it concluded.

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