Oil and Gas Budget

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Going forwardImplications of the Union Budget2013 on the Oil and gas Industry

Publication releaseSenior Management Meet, 1 March, 2013, New Delhi & Mumbai


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India Union Budget2013-2014perspective 04

The Economic Survey 2012-13 05

Analysis of Union Budget2013-2014 11

Major pre-budget expectation of oil and gas industry 17

Signifcant policy changes and initiatives in the oil and gas industry26Commodity balance of petroleum and petroleum products29

Contents


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India Union

Budget 2013-2014perspective

Chapter 1

Months before the budget day, the oil andgas sector had started to receive signalsthat the exchequer was looking to thesector for addressing the scal decit

situation. Diesel prices were raised. Oilcompanies also announced their planto continue to raise the diesel price insmall amounts and to cap the numberof subsidised cylinders to be issued perhousehold. The desire to pass on the costburden of petroleum fuels to consumerswas evident. The need of PSU oilmarketing companies for reducing under-recoveries was addressed, albeit not to thefull extent.

The budget speech dealt with analtogether different but critical subject of

energy security. The acknowledgementby the government of the need to reduceimport dependency by enhancingdomestic oil and gas production wasevident in the budget speech. Stopsin hydrocarbon sector for energysecuritisation appear to be gettingchallenged by the government. Resolvingpolicy ambiguities, allowing economicvalue of gas to reect in its price, tappingunconventional hydrocarbon andimporting more LNG also appear to behigh on the governments agenda.

The nance minister reconrmed theprogress of the government on manyfronts. Promise of reviewing the gaspricing policy to remove ambiguitiesmeant a lot to the exploration andproduction sector. If the ongoingconsultation amongst the stakeholders isany indication, the government appearsto be in a mood to accept the principlesof gas pricing recently suggested byDr Rangarajan Committee. Thus, theproducers are proposed to be getting pricethat producers in gas exporting countriesget. Early indications are that the prices

will rise. Investors will be very happy withthe development, albeit at the cost of somediscomfort to the power and fertilisersectors and to the consumers in turn.

The budget speech announced that in theE&P industry, revenue share will replacethe current prot share mechanism. Thisis a double-edged weapon. This provisionwill help investors to not be subjected tocost scrutiny, even though CAG auditsare not entirely avoidable in a democraticcountry like India. However, thewithdrawal of cost recovery mechanismexposes investors to more risks ofinvestments, and that may dissuade largeoil companies from investing in India.Nonetheless, the attractiveness of sucha change will be proven in next round ofawards incorporating this change. Benetsof this regime will be seen years laterwhen oil and gas under future contracts

will start to get produced.Another clear acknowledgement ofneed of domestic oil production was inthe intent of the government to clearthe stalled NELP blocks. Typically, suchclearances will be subject to conditions,to deal with ambiguities or circumstanceswhich held clearances back. The obviousdemand of the investors would be thatthe conditions need to be pragmaticand facilitating. The government wouldunderstand that long-term gains of energysecuritisation are immense as compared toshort-term revenue benets.

Regarding the shale gas policyintroduction, investors are of mixedopinion. If a new policy is taking so muchtime to be introduced, can the existingpolicy not start unlocking the shalebenets? Could any issues in shale oiland gas development experiences notbe dealt with a specic policy at a laterdate? Apprehensions are also being raisedabout new policy's ability to deal with allissues comprehensively to make the shaledevelopment successful.

The Indian economy continued to face

challenging environment during FY2012-13 due to uncertain global economicenvironment, rising energy prices andstatus quo on domestic policy front.

According to latest estimates released bythe CSO, the Indian economy is likely togrow at 5% in FY 2012-13, the slowest inthe last decade. Indian economy is, thus,

facing a twin challenge of controlling itscurrent and scal account decit whilespurring the growth to bring the economyback on the growth path. The governmenthas been able to contain scal decit to5.2% of GDP against the budget estimate of5.3%. The continued Euro Zone crisis andgloomy economic trends in major economiescontributed negatively, impacting Indiasexports negatively. This, along with highcrude prices and increased gold imports ledto a widening trade gap; hence, the currentaccount decit has reached to 3.9% of GDP.

In order to achieve the dual objective ofcreating positive business environmentspurring economic growth and achievingscal consolidation to ensure long-termmacroeconomic stability, the union budgethas proposed expenditure managementand moderately increasing governmentsrevenue. Based on scal consolidationmeasures proposed in the budget, scaldecit for FY 2013-2014 is projected tocome down to 4.8% from 5.2%. At the sametime, the government is hopeful that Indianeconomy will grow at 6.5% in FY 2013-2014as against 5% in FY 2012-13. However,

rising oil prices may pose a signicantchallenge in achieving the targeted scaldecit and growth target, considering thatthe government has budgeted for petroleumsubsidy of 65,000 crore INR based on thecrude oil price of 110 USD per barrel at thecurrent exchange rate.

Our recent publication Its our turn now E&P partnership for energy security hadstated that the hydrocarbon sector can makeor mar the economy. Its good news that thegovernment has decided to take actions tostrengthen the domestic production and to

reduce the weakening of nancial health ofoil marketing companies.

Going forward,the oil and gas sector willincreasingly be at the centre of action forthe economy.


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Going forward: Implications of the Union Budget 2013 on the oil and gas Industry 5

The Economic

Survey 2012-13

Chapter 2

The Economic Division of the Ministry ofFinance, government of India released theEconomic Survey 2012-13 on 27 February2013. The following excerpts of the Survey

present the macroeconomic context to thedevelopments in the oil and gas sector for

the year 2012-13.

State of economy

In the nancial year 2012-13, the Indianeconomy witnessed a slowdown ineconomic growth primarily attributed toweakness in industrial growth. High ratesas well as policy constraints adverselyimpacted investment resulting in slowingdown the GDP growth rate to 5% for

2012-13.

At a sectoral level, growth in agriculturehas also been weak in 2012-13, followinglower than-normal rainfall, especially inthe initial phases (months of June andJuly) of the south-west monsoon. Theindustrial sector (comprising the miningand quarrying, manufacturing, electricity,gas and water supply and constructionsectors) registered a growth rate of 3.1%in 2012-13 with the rate of growth of themanufacturing sector being even lowerat 1.9%.

After achieving double-digit growth forve years and narrowly missing doubledigits in the sixth year (between 2005-06 and 2010-11), the growth rate of theservices sector also declined to 8.2% in2011-12 and 6.6% in 2012-13. In 2011-12, the sectors that particularly slowedwithin the services sector was trade,hotels and restaurants as well as transportand communications, with their growthfurther declining in 2012-13. Activitiesin this sector, being forms of deriveddemand, tend to grow at a slower ratewith the slackening of economic activity in

the industry and agriculture sectors.

A number of factors are responsible forthe economy to slow down so rapidlydespite recovering strongly from theglobal nancial crisis. First, the boost to

demand given by monetary and scalstimulus following the crisis was large.Final consumption grew at an average ofover 8% annually between 2009-10 and

2011-12. The result was strong inationand a powerful monetary response thatalso slowed consumption demand.

Second, starting in 2011-12, corporate andinfrastructure investment started slowing,both as a result of investment bottlenecksas well as the tighter monetary policy.Thirdly, even as the economy slowed,it was hit by two additional shocks:a slowing global economy, weigheddown by the crisis in the Euro area anduncertainties about scal policy in the US,and a weak monsoon, at least in its initial

phase.As growth slowed and governmentrevenues did not keep pace with spending,the scal decit threatened to breachthe target. With government savingsfalling, and private savings also shrinking,the current account decit (CAD) alsowidened. As a result of weak growth intrading partner countries, Indian exportsalso declined. In the rst half of FY2012-13 (April-September 2012), therewas a steep decline in exports. Importsdid not decline as much in percentagepoint terms. Inelastic oil imports were theprimary reason for the relatively smallerdecline of imports. All these in conjunctioncontributed to widening the CAD.

India cannot take the externalenvironment for granted and has to movequickly to restore domestic balance.The government is committed to scalconsolidation. This along with demandcompression and augmented agriculturalproduction should lead to lower ination,giving the RBI the requisite exibilityto reduce policy rates. Lower interestrates could provide an additional llip to

investment activity for the industry andservices sectors, especially if some of theregulatory, bureaucratic and nancialimpediments to investment are eased.

Given such a scenario, where all three majorsectors of the economy perform better in2013-14 as compared to 2012-13, the overalleconomy is expected to grow in the range

of 6.1 to 6.7% in 2013-14. Of course, theseprojections assume a normal monsoon,further moderation in ination as expected(to induce further relaxation of the tightmonetary stance), and mild recovery ofglobal growth as anticipated.

Prices

Headline wholesale price index (WPI)ination which averaged 9.56% in 2010-11 and 8.94% in 2011-2012 decelerated to7.55% in the rst nine months of 2012-13

(April-December). Although in December2012, ination was at a three-year low of7.18%, it has been in the range of 7 to 8% inthe last 13 months.

Relative importance of different commoditygroups contributing to this persistentination, however, changed over time.The persistently elevated prices for animalproducts (eggs, meat and sh), the risein the prices of cereals and vegetables,along with the increase in internationalprices of fertilisers (non-urea) and theincrease in administered prices of dieselhave contributed to ination in differingdegrees over time. The build-up in pricepressures seems to have tapered off in recentmonths, as headline WPI has remainedsteady. Month-over-month price changes inmost commodity groups have been small,indicating that the pressure on generalisedination has fallen.

The level of ination and its movementacross three major commodity groups variedsignicantly. Ination of primary articleswith the weight of 20.12% in the WPI,after declining to 6.7% in Q4 of 2011-12,increased in the rst three quarters of the

current year and was 10.6% in December2012. Ination for commodities in the fueland power group, with a weight of 14.91%in the WPI witnessed some moderation inthe current year.


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Apart from the base effect, decelerationin the ination of non-administeredpetroleum products contributed to themoderation. This helped contain theeffects of the increase in administeredprices of diesel effected in September2012. Finally, the deceleration in theination of manufactured products witha weight of 64.97% in WPI, was relativelysharp.

The prices of non-administered petroleumproducts tracked international prices andwitnessed moderation in ination fromits peak in Q3 of 2011-12. The increasein ination of administered petroleumproducts in Q3 of 2012-13 was due toan increase in the prices of diesel. Dieselprices have been revised again in Januaryand the inationary impact of this revisionwould be reected in the WPI for January2013. While this will add to ination,it will also reduce suppressed ination,and through its contribution to scalconsolidation, have a moderating effect inthe long run.

An inter-ministerial group (IMG) on

ination was set up on 2 February 2011,on the recommendation of the PrimeMinister, under the chairmanship ofthe Chief Economic Advisor, Ministry ofFinance to review the overall inationsituation, with particular reference toprimary food articles. The IMG has so farhad eight meetings between 15 February2011 and 31 January 2012 coveringvarious aspects, including informationsystem on all aspects of price monitoring,foreign direct investment (FDI) in multi-brand retail, reform in the APMC Act,policy options for diesel pricing and

ination in protein-rich products, amongothers.

In the sixth and seventh meetings ofthe IMG held on 28 May 2012 and 14September 2012, it had discussed policyoptions to reduce price distortionsbetween diesel and other petroleumproducts. It was suggested that subsidyon diesel may be gradually shifted toxed per litre basis and price adjustmentcould be more frequent at regularintervals, maybe even monthly. It wasalso mentioned that any revision in diesel

prices would have direct as well as indirectimpact on ination, which continues to beat elevated levels.

External trade

Bolstered by the measures taken bythe government to help exports in theaftermath of the world recession of 2008and also the low base effect, Indias exportgrowth in 2010-11 reached an all-timehigh of 40.5%, since Independence.Though it decelerated in 2011-12 to21.3%, it was still above 20% and higherthan the compound annual growth rate(CAGR) of 20.3% for the period 2004-5 to2011-12.

After registering high growth of 56.5%in July 2011, export growth starteddecelerating with a sudden fall to singledigits in November 2011 as a result ofthe emerging global situation and thento negative gures from March 2012.Monthly export growth rates in 2012-13(April-December) were negative except fora marginal positive growth in April 2012.For three months in 2012-13, exportsdeclined YOY by double digits with thelargest decline recorded in July 2012at -15.1%. In January, 2013, there is a

marginal positive growth of 0.8%.Export growth in dollar terms wasnegative at -4.9% in 2012-13 (April-January), compared to 21.3% growth in2011-12 (full year). In rupee terms, it waspositive at 9.1%, though here too, therewas a deceleration from the 28.3% in2011-12 (full year).

There are at least two reasons for thedecline in export growth: externalfactors or partner country incomeschanges in exchange rate. GDP growth ofpartner countries has also slowed down

signicantly. This would exert a negativeeffect on Indias export growth. On theother hand, the real effective exchangerate for India has depreciated, suggestinga positive effect on exports.

After recovering in 2010-11 from theprevious years fall, Indias merchandiseimports increased further to 489.2 billionUSD with a growth of 32.3% in 2011-12.This was due to the increase of 46.2% inthe growth of petroleum, oil, and lubricant(POL) imports and non-POL imports by26.7%. POL imports (with a share of31.7% in Indias total imports) registeredhigh growth mainly due to an increasein the import price of the Indian crudeoil import basket by 31.5% in 2011-12 asagainst 22% in 2010-11.

POL import volume growth deceleratedfrom 14.9% in 2009-10 to 3.7% in 2010-11and 3.5% in 2011-12. International oil prices(Brent) which reached a high of 132.47USD per bbl in July 2008 declined sharplyto 40.35USD per bbl in December 2008,following the global recession. From 2009onwards, oil price has been increasing withintermittent volatility, reaching 125.33 USDper bbl in March 2012 and falling marginallywith volatility in the following months.Currently Brent oil price is hovering around110 USD per bbl.

At 406.9 billion USD imports in 2012-13(April-January) registered a growth of0.01%. During 2012-13 (April-December),POL imports at 125.2 billion USD grew by12.8%.

Trade decit (on customs basis) reacheda peak of 184.6 billion USD in 2011-12from 118.6 billion USD in 2010-11 withthe highest growth of 55.6% since 1950-1.Moderate export growth and high importgrowth, particularly in POL imports due tohigh prices and high gold and silver imports,led to the highest-ever trade decit in India

since 1950-1, contributing to a high currentaccount decit (CAD) of 4.2% of GDP.

POL imports grew by 46.2% in 2011-12.POL export growth was relatively lower at34% due to lower growth in the quantumof POL exports by 3.8%, resulting in netPOL imports increasing to 99.3 billion USDin 2011-12. In 2012-13 (April-November),though POL import growth moderated to11.7%, POL export growth was negative at-7.3% which was also due to the decline inthe volume of POL exports by -0.9%. As aresult, the share of net POL imports in total

imports increased to 23.5% in 2012-13(April-November) compared to 20.3% in2011-12 (whole year).

Compositional changes in Indias exportbasket have been taking place over the years.Share of petroleum, crude and productsexports, which also include rened items,increased from 4.3% in 2000-1 to 18.3%in 2011-12 and 18.6% in 2012-13 (April-November).

There have been some signicantcompositional changes in Indias importbasket in recent years. The share of POL

imports increased from 28.7% in 2010-11 to 31.7% in 2011-12 (with a very highgrowth rate) and 34.6% in 2012-13 (April-November).


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Subsidies

The Budget for 2011-12 had estimatedtotal expenditure to be contained at 14.0%of GDP. There was an overshooting onaccount of the high global oil prices andthe insufcient pass-through to domesticoil and fertiliser prices. The overshootingof expenditure on subsidies was alsobecause of the accounting changes whichplaced all subsidies above the line.

The Budget for 2012-13 estimated growthin total expenditure at 13.1% over 2011-12(RE) and sought to restrict expenditureon subsidies to 2% of GDP. As against aprovision of 3,640 crore INR in 2011-12for oil subsidies, the Budget for 2012-13provisioned an amount of 3,580 crore INRassuming a certain level of global crude oilprice. It must be noted that oil subsidiesare paid to oil marketing companies(OMC) on a calendar-year basis becauseonly after quarterly results are declared isthe subsidy released.

In the event, the Indian basket crude oilwas 107.52 USD per bbl (April-December)

in 2012 and even with the pass-througheffected in the course of the year, under-recoveries of OMCs surged and wereestimated at 1,24,854 crore INR duringApril-December 2012-13. As the bulkof the under-recoveries is accountedfor by two subsidised products, viz.diesel and LPG, the government raiseddiesel prices by 5 INR per litre andcapped the subsidised cylinders at sixper connection per year in September2012. With continued rise in prices, on17 January 2013 the government furtherpermitted OMCs to raise diesel prices in

small measures periodically. However,in order to protect household budgets, itsimultaneously raised the annual LPG capfrom six to nine cylinders per connection.

The high level of global crude oil pricesalso has a signicant bearing on the levelof fertiliser subsidies because it is notonly a key input as feedstock, but alsobecause there is inadequate pass-throughin urea (the major domestic fertiliser)prices. Subsidy on fertilisers had increasedsubstantially from 32,490 crore INR in2007-8 to reach 67,199 crore INR in 2011-

12 (RE). It is budgeted at 60,974 crore INRin 2012-13.

Oil and gas sector

During FY 2011-12, crude oil productionwas 38.09 million metric tonnes (MMT)with the share of national oil companies at72.4%. The projected crude oil productionin 2012-13 is 42.31 MMT which is about11.1% higher than that in 2011-12. Theincrease in production is expected mainlyon account of higher crude oil productionfrom Barmer Fields, Rajasthan. Crudeoil production by Cairn Energy India PvtLtd in Rajasthan started with effect from

29 August 2009 and reached 5.77 MMTduring April-November 2012 against4.26 MMT during the same period of2011-12. Overall crude oil productionduring April-November 2012-13 at 25.39MMT, however, shows a negative growthof 0.54% over the same period of theprevious year.

The average natural gas productionin the year 2011-12 was 130 millionmetric standard cubic metre per day(MMSCMD) which was about 9% lowerthan the previous year mainly due to

lower production from the KG D6 deep-water block. The projected natural gasproduction in 2012-13 is about 117.8MMSCMD, which is about 9% lower thanproduction in the previous year. Naturalgas production during April- November2012-13 was 28.05 billion cubic metre(BCM) as compared to 32.28 BCM duringthe same period of the previous year.

Exploration of domestic oil andgas

As on April 2012, about 737 MMT of

oil equivalent hydrocarbon reserveshave been added under the NELP. Theinvestment made by Indian and foreigncompanies until April 2012 was of theorder of 20.2 billion USD, of which12.1 billion USD was on hydrocarbonexploration and 8.1 billion USD was onthe development of discoveries. With aview to further accelerating the pace ofexploration, in the ninth round of theNELP (NELP-IX), 34 exploration blockswere offered. These include eight deep-water blocks, seven shallow-water blocks,11 on-land blocks, and eight Type-S on-land blocks. Nineteen production-sharingcontracts have already been signed withthe awardees. A total of 254 production-sharing contracts have been signed underthe NELP so far.


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Domestic exploration of othergaseous fuels

Coal bed methane (CBM)

India has the fourth-largest proven coalreserves in the world and holds signicantprospects for exploration and exploitationof CBM. Under the CBM policy, 33exploration blocks have been awardedin the states of Andhra Pradesh, Assam,Chhattisgarh, Gujarat, Jharkhand, MadhyaPradesh, Maharashtra, Orissa, Rajasthan,

Tamil Nadu and West Bengal. Out of thetotal available coal-bearing area of 26,000sq. km for CBM exploration in the country,exploration has been initiated in about17,000 sq. km. The prognosticated CBMresources in the country are about 92trillion cubic feet (TCF), out of which only8.92 TCF have so far been established.Commercial production of CBM in Indiahas now become a reality with currentCBM gas production of about 0.28MMSCMD.

Shale gasShale gas can emerge as an importantnew source of energy in the country.India has several shale formationswhich seem to hold shale gas. The shalegas formations are spread over severalsedimentary basins such as Cambay,Gondwana, Krishna-Godawari on-landand the Cauvery. The Directorate Generalof Hydrocarbans (DGH) has initiated stepsto identify prospective areas for shale gasexploration.

A multi-organisational team (MOT) of the

DGH, Oil and Natural Gas Corporation(ONGC), Oil India Limited (OIL) andGas Authority of India Limited (GAIL)has been formed by the government toexamine the existing data set and suggesta methodology for shale gas developmentin India. Further, a memorandum ofunderstanding (MoU) between theDepartment of State, USA and theMinistry of Petroleum and Natural Gas hasbeen signed for the assessment of shalegas resources in India, imparting trainingto Indian geo-scientists and engineersand assistance in the formulation of

regulatory frameworks. A draft shale oil /gas policy was placed in the public domainby the government for inviting comments.The views and comments received fromvarious stakeholders and agencies areunder examination.


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Equity oil and gas from abroad

In view of an unfavourable demand-supply ratio of hydrocarbons in thecountry, acquiring equity oil and gasassets overseas is an important strategyfor enhancing energy security. Thegovernment is encouraging national oilcompanies to aggressively pursue equityoil and gas opportunities overseas. ONGCVidesh Limited (OVL) has produced about8.753 MMT of oil and equivalent gasduring 2011-12 from its assets in Sudan,

Vietnam, Venezuela, Russia, Syria, Brazil,South Sudan and Colombia.

The estimated crude oil and natural gasproduction in 2012-13 is about 6.865MMT. The reasons for lower overseasproduction are geopolitical problemsin South Sudan and Syria. Oil public-sector units (PSU), viz. OVL, India OilCorporation (IOC), OIL, Bharat PetroleumCorporation Limited (BPCL), HindustanPetroleum Corporation Limited (HPCL),and GAIL have acquired exploration andproduction (E&P) assets in more than 20countries.

Rening capacity

The total rening capacity in the countryincreased from 187.4 MMT (as on 1April 2011) to 215.1 MMT (as on 1January 2013) and is projected to reach218.4 MMT by the end of 2012-13 and239.6 MMT in 2013-14 with capacityaugmentation of existing reneries andcommissioning of the Paradip Renery.Renery production (crude throughput)during 2011-12 was 211.4 MMT (including

the Jamnagar Renery under the specialeconomic zone [SEZ] by RelianceIndustries Ltd) showing an increase of2.6% compared to a production of 206.15MMT in 2010-11.

During the current nancial year (April-November 2012-13), renery production(crude throughput) is 141.45 MMT.The country is not only self-sufcientin rening capacity for its domesticconsumption but also exports petroleumproducts substantially. During 2011-12,the country exported 60.84 MMT of

petroleum products worth 2,66,486crore INR.

Pipeline network and city gasdistribution (CGD) network

There has been substantial increase inthe pipelines network in the country with32 product pipelines with a length of11,274 km and capacity of 70.688 MMT atpresent. There are also 16 crude pipelinesspreading over 8,558 km with a capacityof 106.45 MMT. In addition, there areLPG pipelines of 2,313 km with 3.94 MMTcapacity and gas pipelines of 13,428 kmwith 355 MMSCMD capacity. The gas

pipeline infrastructure is being augmentedwith about 14,889 km of pipeline networkwith additional capacity to transport 264MMSCMD of gas by 2015-16. In addition,around 4,300 km of pipeline network hasbeen authorised by the Petroleum andNatural Gas Regulatory Board (PNGRB)which will further add capacity totransport 184 MMSCMD of gas.

With increased availability of gas inthe country, the city gas distribution(CGD) network has been enlarged tocover various cities supplying gas for

domestic consumers, public transport,and commercial and industrial entities.At present, there are a total of 588compressed natural gas (CNG) stationsacross the country. Vision 2015 envisagesproviding piped natural gas (PNG) tomore than 200 cities across the country.The current consumption of gas in theCGD network is around 14 MMSCMD, ofwhich 6.63 MMSCMD is from regasiedliqueed natural gas (RLNG). At present,there are several entities operating in 43geographical areas (GAs). The PNGRBhas recently invited bids for authorisation

of CGD in these cities. The CGD sectorcomprises CNG and PNG customers.The PNGRB has envisaged a rollout planof CGD network development throughcompetitive bidding in more than 300possible GAs on the basis of expressions ofinterest (EOI) submitted to the board.

Rajiv Gandhi Gramin LPGVitaran Yojana (RGGLVY)

Vision-2015 adopted for the LPG sectorinter alia focuses on raising the LPGpopulation coverage in rural areas andareas where LPG coverage is low. TheRajiv Gandhi Gramin LPG Vitaran Yojana(RGGLVY) for small-size LPG distributionagencies has been launched in 2009.

Under this scheme 75% of the populationis to be covered by 2015 by releasing 5.5crore new LPG connections. To ensurethat growth of LPG usage is evenly spread,public-sector oil marketing companies(OMCs) are assessing and identifyinglocations in a phased manner under theRGGLVY. OMCs have undertaken to set up5,261 LPG distributors in 29 states. Out ofthis, 1,591 LPG distributors had alreadybeen commissioned as on 1 November2012. Selection for the rest of the locationsis in progress as per policy.

Free LPG connections to BPLrural households

In order to check leakages, adulterationand inefciency resulting from the currentsystem of delivery of subsidised products,the government of India set up a task forcefor evolving a suitable mechanism for thedirect transfer of subsidies to individualsand families entitled to subsidisedkerosene, LPG and fertilisers. A pilotproject was launched in Mysore. So far,details of 35,000 customers have beencollected. Of these, nearly 18,000 haveauthenticated Aadhaar numbers. As on25 November 2012, OMCs had completedmore than 35,000 successful biometric-authenticated deliveries. Modalities onsubsidy payment as token amount (10INR) have been nalised with a sponsorbank and participating banks using theAadhaar payment bridge. It has now beendecided to close the Mysore Pilot Projectas Mysore is one of the 51 districts selectedfor roll-out under the wider direct benettransfer scheme.

Energy prices

In case of petroleum products pricing, thegovernment dismantled the administeredpricing mechanism in 2002. This decision,however, was not fully implemented anddomestic pass-through of global priceincreases remained low for petrol, diesel,kerosene and LPG. On 25 June 2010, thegovernment announced that the price ofpetrol was fully deregulated and the oilcompanies were free to x it periodically.

However, diesel price deregulationwas deferred. In January 2013, thegovernment announced the new roadmap


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providing for a gradual price increase forreducing diesel under-recoveries.

Admissibility of a subsidised number ofliqueed petroleum gas (LPG) cylindersand prices of LPG have also recently beenrevised.

Pricing of gas is presently done under thenew exploration licensing policy (NELP).The government provides the operatorfreedom to sell the gas produced fromthe NELP blocks at a market-determinedprice, subject to the approval of the pricing

formula. The government is reviewingpricing under the price-sharing contract(PSC) to clarify the extent to whichproducers will have the freedom to marketthe gas.

Owing to a number of external and internalfactors, the viability of airline operationsin India has come under stress. A highoperating cost environment owing to highand rising costs of aviation turbine fuel(ATF) coupled with rupee depreciation ismaking operations unviable for carriersin India. The expert report of NathanEconomic Consulting India Private Ltd(Nathan India) which went into thequestion of pricing and the tax regimegoverning ATF concluded that ATF prices inIndia are signicantly higher (at least 40%)than in competing hubs in the region suchas Singapore, Hong Kong and Dubai.

Therefore, there is need to rationalise thetax regime, particularly value-added tax onATF which is in the range of 20 to 30% inmost states. The Ministry of Civil Aviationis of the view that ATF should be includedunder the declared category of goods underthe relevant provision of the Central Sales

Tax Act so that a uniform levy of 5% isachieved. Equally important is the needfor a transparent pricing regime for ATFin India. A high tax regime for aviation ingeneral and ATF in particular will reducethe wider economic benets available fromaviation, resulting in negative impact oneconomic growth and overall governmentrevenue bases.

VGF for PPP projects

Under the scheme for nancial supportto PPPs in infrastructure (Viability GapFunding Scheme) [VGF], 145 projectshave been granted approval with a totalproject cost (TPC) of 80,203.28 croreINR and a VGF support of 1,56,72.68crore INR and 902.96 crore INR has beendisbursed. Thirteen new sub-sectorshave been included in the list of sectorseligible for VGF support under thescheme. These include the following:

Oil, gas and liqueed natural gas(LNG) storage facility [includes citygas distribution (CGD) network;oil and gas pipelines (includesCGD network); irrigation (dams,channels, embankments, etc);telecommunication (xed network)(includes optic bre, wire, cablenetworks which provide broadbandand internet); telecommunicationtowers; terminal markets; commoninfrastructure in agriculture markets;and soil-testing laboratories

Capital investment in the creation ofmodern storage capacity includingcold chains and post-harvest storage

Education, health and skilldevelopment

Internal infrastructure in nationalinvestment and manufacturing zones


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Analysis of Union

Budget 2013-2014

Chapter 3

Personal tax rates

The tax slabs for individuals, HUFs,AOPs and BOIs remain unchanged

Surcharge of 10% applicable forindividuals having total income morethan 1 crore INR.

Tax credit of 2,000 INR is available toindividuals having total income morethan 2 lakh INR but less than or equalto 5 lakh INR.

One-time interest deduction of 1 lakhINR is available on housing loan takenby rst home buyer.

Corporate tax rates

Corporate income tax rate is proposedto remain unchanged at 30%.

The MAT rate remains unchanged at18.5%.

The DDT rate also remains unchangedat 15%.

Surcharge rate remains unchangedfor the companies having income upto 10 crore INR. For companies havingincome or book prots more than10 crore INR, the rate is proposed to

increase as follows: Domestic companies: From 5% to

10%

Foreign companies: 2% to 5%

Category of tax payer Existing effective rate Proposed effective rate

On domestic companies Income less than 1 crore INR

Income more than 1 crore INR but

less than 10 crore INR

Income more than 10 crore INR

30.90% 30.90%

32.44% 32.44%

32.44% 33.99%

On foreign company

Income less than 1 crore INR

Income more than 1 crore INR but

less than 10 crore INR

Income more than 10 crore INR

41.20% 41.20%

42.02% 42.02%

42.02% 43.26%

Effective rate as follows:

The higher surcharge rate of 10%

is also applicable for dividenddistribution tax.

The concessional rate of 5% ofwithholding tax on interest paid by anIndian company further extended toinvestment in long-term infrastructurebonds through Indian rupeedenominated designated accounts byforeign companies.

Tax holiday: Powerprojects

It is proposed that the companiesengaged in the following businessesshall be eligible to claim prot-linkedincentive for a further period of oneyear, i.e. the sunset date has beenextended to 31 March 2014 (from thepresent 31 March 2013):

Generation or generation anddistribution of power

Transmission or distributionby laying a network of newtransmission/ distribution lines

Undertakes substantial renovationand modernisation of the existingnetworks of transmission/distribution lines.

International taxation

Tax rate for royalty and fees for technicalservices (FTS)

At present, the tax rate applicable onroyalty and fees for technical services(FTS), on a gross basis, varies from10% to 30% depending upon thedate on which the agreement wasentered into. However, the tax treatieswith different countries provide fortaxability of gross amount of royalty/FTS at the tax rate ranging from 10%to 25%.

The Finance Bill, 2013 proposes tostreamline the tax rate of royalty orFTS at 25% under the Indian tax lawsubject to benet under tax treaties.

This amendment will take effect from 1April 2014 and will, accordingly, applyin relation to the tax year 2013-14 andsubsequent years.

Tax residency certicate

The Finance Bill, 2013 seeks to amendsections 90 and 90A in order to provide

that submission of a tax residencycerticate is a necessary but not asufcient condition for claiming treatybenets.


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This amendment will take effectretrospectively from 1 April 2013 andwill, accordingly, apply in relation tothe tax year 2012-13 and subsequentyears.

General Anti-AvoidanceRules (GAAR)

It is proposed that GAAR will comeinto effect from tax year 2015-16.

It will apply to impermissible

avoidance arrangements, whose mainpurpose is to obtain a tax benet (inaddition to the other conditions). Theonus is on the taxpayer to prove thegenuineness of the transaction. Allarrangements will be presumed tohave been entered into with the mainpurpose of obtaining a tax benet,unless the contrary is proved by the taxpayer. An arrangement will be deemedto be lacking commercial substance,if inter alia, the arrangement doesnot have a signicant effect upon thebusiness risks or net cash ows of anyparty to the arrangement (apart fromthe tax benet).

In the last year's budget, the followingfactors were specically excluded fordetermining whether an arrangementlacks commercial substance: (i) periodof time of existence of arrangement;(ii) payment of taxes under thearrangement; (iii) exit route isprovided under the arrangement. Thenew law provides that the aforesaidfactors may be relevant but shall notbe sufcient for determining whether

an arrangement lacks or does not lackcommercial substance.

The directions of the ApprovingPanel are binding on the revenuedepartment as well as the tax payer.The assessment orders passed with thedirections of the Panel continue to beappealable by the taxpayer to the ITAT.The approval panel will comprise ofChairperson (who is/ has been judgeof a High Court), one member fromIRS (not below rank of CCIT) andanother member will be an academic/

scholar having special knowledge ofdirect taxes, business accounts andinternational trade practices.

The GAAR provisions are silent onthe following recommendations ofthe Shome Committee which theGovernment had specically accepted:

Grandfathering of the investmentsmade before 30 August 2010

Monetary threshold of 3 crore INRof tax benet in the arrangement.The draft guidelines hadrecommended that a monetarythreshold be prescribed for theapplication of GAAR

Where a part of the arrangementis an impermissible avoidancearrangement, GAAR will berestricted to the tax consequence ofthe impermissible part and not tothe whole arrangement

Corresponding adjustment to thetax payers requirement to issueshow cause notice by tax ofcer

Investment allowance

On the acquisition of new plant and

machinery worth more than 100crore INR, the companies engagedin manufacturing or production ofany article or thing shall be eligibleto claim an investment allowancemaximum of 15% during nancial year2013-14 and 2014-15.

The benet of this allowance shall onlybe available for nancial year up to2014-15.

Benet of investment allowance shallnot be available to following:

Used plant or machinery Ofce equipments or plant &

machinery installed at residentialaccommodation

any ofce appliances includingcomputers or computer software

any vehicle

ship or aircraft

any plant or machinery, the wholeof the actual cost of which isallowed as deduction.

In case of transfer of new asset before5 years of installation, the amount ofdeduction allowed shall be treated asincome.

The above incentive would be inaddition to the normal and additionaldepreciation on the same plant &machinery.

Dividend Distribution Tax(DDT)

Dividend received by Indian companyfrom its foreign subsidiary not toattract dividend distribution on furtherdistribution by Indian company to its

share holders Concessional tax rate of 15% on

dividends received by domesticcompany from its overseas subsidiaryallowed for one more year

DDT of 20% to be levied on sharebuyback by an unlisted company. Notaxation in the hands of shareholder

Transfer of immovableproperty

At present, in case of a transferof an immovable property for aconsideration less than the valueadopted by any authority of a StateGovernment for the purpose ofpayment of stamp duty, the full valueof consideration for the purpose ofcapital gains is taken to be the stampduty value.

These provisions do not apply totransfer of immovable property, heldby the transferor as stock-in-trade.

It is proposed that stamp duty value be

adopted for sale of land and buildingheld as stock in trade, if transferred fora value less than the stamp duty value.

Under the existing provisions, transferof immovable property for inadequateconsideration is taxed in the hands ofthe transferee, if it is a company. It isproposed by the Bill to extend it to thetransferees, who are individuals orHUF.


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Tax deduction on transferof certain immovableproperties

Under the present law, buyer is notrequired to deducted tax at sourceon transfer of immovable propertyby a resident (except in the case ofcompulsory acquisition of certainimmovable properties).

It is proposed to introduce a newsection in the Act for withholding tax

at1% of consideration on transferof immovable property (other thanagricultural land).

These provisions shall not apply if thetotal consideration is less than 50 lakhINR.

Liability of director in caseof private companies

The current provisions provide for therecovery of dues from the directors of

the private company. But such dueswere limited to 'tax' payable under theAct. Judiciary interpreted that theseprovisions do not apply for recoveryof penalty, interest and any other sumpayable under the Act.

The Finance Bill, 2013 proposes toclarify that the term tax due includespenalty, interest or any other sumpayable under the Act.

Commodity TransactionTax (CTT)

CTT of 0.01% has been introducedon transaction of sale of commodityderivative in respect of commoditiesother than agricultural commodities.The same would be treated as non-speculative and would be allowed asdeduction.

Transfer pricing provisions

Rules on safe harbour will be issuedafter examining the reports of theRangachary Committee, which isexpected by 31 March 2013.

Wealth Tax

Wealth Tax returns to be ledelectronically

Rules pertaining to electronic ling of

wealth tax return to be notied

Policy

It is proposed that the oil and gasexploration policy will be reviewed tomove from prot sharing to revenuesharing contracts.

A policy to encourage explorationand production of shale gas will beannounced.

The natural gas pricing policy will bereviewed and uncertainties regardingpricing will be removed.

NELP blocks that were awarded but arestalled will be cleared.

Direct Taxes Code

The government's endeavour is tobring DTC to the Parliament before theend of the Budget session.

Tax AdministrationReform Commission

It is proposed to set up a TaxAdministration Reform Commission:

to review the application of taxpolicies and tax laws; and

submit periodic reports that can beimplemented for strengthening thecapacity of tax system.


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Removal or extension of sunset clause for tax holiday on income from production of mineral oil to blocks licensed under NELP IX No

Availability of tax holiday under section 80-IB (9) on the natural gas produced from all the blocks awarded under NELP/CBM or in

any other manner by the Central or State Government

No

Tax holiday should be given to each well treating, it as a separate undertaking No

Ceiling of 20% on the deduction for investment into site restoration fund either removed or increased to 50% No

Tax holiday to E&P companies to be enhanced to ten years from seven years and flexibility to choose period of ten tears of tax

holiday out of 15 Years

No

Extension of the sunset clause beyond 31 March 2012 to 31 March 2016 for tax holiday under section 80-IA(4) for undertakings set

up for generation or generation and distribution of power

Yes

(Partially)

Exemption from MAT to the companies eligible under section 80-IB(9) No

Weighted deduction be extended to expenditure in respect of drilling and exploration activities under section 42 in line with R&Dexpenses

No

Weighted deduction under section 35 (2AB) on R&D activities for bio-fuels No

Condition for surrender of block to be deleted for claiming deduction for infructuous or abortive exploration expenses under

section 42.

No

Benefit under section 35AD to be extended to intra-city and inter-state distribution network No

Conditions of approval under section 35AD of Petroleum and Natural Gas Regulatory Board (PNGRB) for specified business

and availability of common carrier capacity as per PNGRB regulations, may be waived for crude oil pipelines and the dedicated

pipelines which are dedicated for supply of petroleum products to a specific consumer

No

Weighted deduction under section 35AD to cross-country pipeline network No

Removal of restrictions for set off of losses for specified business of section 35AD No

Infrastructure status to LNG projects for the purpose of tax holiday under section 80-IA No

100% depreciation allowance on capital investments made by refineries producing fuels for up-gradation of fuel quality as perstringent emission norms similar to pollution control equipment

No

Extension of the sunset clause beyond 31 March 2012 for tax holiday under Section 80IB(9) for undertakings engaged in refining ofmineral oil

No

Deduction Under Section 80-IB (9): Income from Government subsidy and discount on LPG/SKO from upstream companies to betreated as income from the business of the undertaking for the purpose of deduction under section 80-IB(9)

No

Interest under section 234 B and 234 C exemption to oil companies No

Profit-based or investment-based incentive to OMCs for expansion and up-gradation of their refineries No

Clarification that the income of O&G service providers shall not be chargeable to income tax @ 10% on gross basis and will be

eligible for presumptive tax regime

No

Scorecard (DT)


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Indirect taxes

Goods and Services Tax: Statusupdate

One of the most awaited expectationsfrom the Budget was that the FinanceMinister would lay down a clear roadmapfor the implementation of GST. TheBudget, however, has dashed these hopesto the extent that there was neither anyannouncement on the likely date ofintroduction of GST nor a roadmap for its

introduction.

Nonetheless, the nance minister hasmade signicant comments whichhighlight the governments commitmentto the expeditious implementation of GST.He announced that a majority of the statesagree to the introduction of GST and theconsequential need for amendment tothe Constitution and the introductionof a draft GST law that will be jointlydrafted by the State Finance Ministers andthe GST Council. The nance ministerwas optimistic that the draft bill on

constitutional amendment and draft billon GST will be introduced in Parliament ina few months.

The seriousness of the governmentto implement GST has been furtheremphasised by the fact that a sum of 9000crore INR has been set apart towardsthe rst installment of the balance CSTcompensation to states. This has been amajor stumbling block in moving to a GSTregime. It now needs to be seen to whatextent the states move forward and workwith the government to introduce thistransformation in the indirect tax regimeof India.

Customs

Tariff

The median rate of basic customs duty(BCD) has been maintained at 10%.

There has been no change in thecustom duty rates of petroleumproducts.

Effective 1 March 2013

BCD and CVD on bituminous coalhave been reduced from 5 and 6 to 2%respectively.

BCD and CVD on steam coal havebeen increased from nil and 1 to 2%respectively.

Non tariff

Effective the date of enactment of theFinance Bill

The time limit for the payment ofcustoms duty has been reduced fromve to two days from the date of returnof the bill of entry, failing which the

importer will be liable for payment ofinterest at prescribed rates.

The maximum period for which theTribunal can grant a stay of recoverieshas been limited to 365 days. The staywill stand vacated if the appeal is notdisposed off by the Tribunal within thespecied time period of 365 days.

The scope of activities in relationto which an advance ruling can beobtained has been expanded to covernew business of import or exportproposed to be undertaken by the

existing importer or exporter, as thecase may be.

CENVAT

Tariff

The standard rate of excise dutyfor non-petroleum goods has beenmaintained at 12%.

Non-tariff


The provisions relating to reversalor payment of CENVAT credit onthe removal or writing-off of capitalgoods and inputs have been amendedto provide for recovery of amount in


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case of failure to make the payment interms of Rule 14 of the Cenvat CreditRules, 2004.

Effective date of enactment of theFinance Bill

The following amendments have beenmade to the Advance Ruling provisionsunder the Central Excise Act, 1994:

Public limited companies have beenincluded in the list of applicantswho may make application for

advance ruling (effective 1 March2013).

The scope of activities in relationto which an advance ruling can beobtained have been expanded tocover production or manufacture ofgoods including any new businessof production or manufactureproposed to be undertaken by anyexisting manufacturer or producer.

The scope of advance rulingshas been expanded to includethe question relating to the

admissibility of CENVAT credit ofservice tax paid on input services.Prior to the amendment, theadvance ruling was restricted to theavailability of CENVAT credit ongoods used in the manufacturingprocess.

The maximum period for which theTribunal can grant a stay of recoverieshas been limited to 365 days. The staywould stand vacated if the appeal isnot disposed off by the Tribunal withinthe specied time period of 365 days.

The scope of mode of delivery ofdecisions, order and summons hasbeen expanded to cover speed-postwith proof of delivery and couriers asapproved by the CBEC.

Service tax


Public limited companies have beenincluded in the list of applicants whomay make an application for advanceruling under Sec 96A of the FinanceAct, 1994 (Finance Act).

Effective 1 April 2013

Exemptions from payment of servicetax on the transportation of petroleum

and petroleum products through rail orvessel has been withdrawn.

The scope of service tax has beenexpanded to cover air-conditionedrestaurants whether or not having thelicence to serve liquor.

Effective date of enactment of theFinance Bill

A negative list of services has beenexpanded to include processes underthe Medical and Toilet Preparations(Excise Duties) Act, 1955 under the

category of process amounting tomanufacture or production.

Clarification to the effect that mere cash transactions between members and the

unincorporated joint ventures and between the members inter-se shall not qualify as

services; hence, will not be leviable to service tax

No

Exemption from service tax on input services consumed by E&P companies in relation to

exploration and production activities

No

Exemption from payment of service tax on transportation of petroleum products by road or

pipelines

No

No service tax implications on recoveries made by an employer from employee No

Service tax adjustments for amounts written off as bad debts No

Withdrawal of requirement to pay service tax under part ial reverse mechanism No

Expansion of the list of goods that can be imported duty-free by E& P companies to coverall goods imported in relation to petroleum operations

No

Removal of National Calamity Contingent Duty (NCCD) on crude oil No

Exemption from payment of customs duties on the import of liquefied natural gas (LNG) (on

sectors other than power)

No

Availability of CENVAT credit on crude and product pipelines located outside the refineries No

CENVAT credit on cement and steel articles No

Inclusion of goods required for laying down of natural gas pipeline network in the category

of goods eligible for concessional CST against form C

No

Declared goods status to natural gas and naphtha under CST regulations No

Scorecard (IDT)

Provisions have been introduced forthe levy of penalty which may extendto 1 lakh INR on directors, managers,secretaries or other ofcers of suchcompany who were in charge at thetime of specied contraventions.Also, specic provisions have beenintroduced to arrest a person in case ofspecic contraventions.

The maximum period for which theTribunal can grant a stay of recoverieshas been limited to 365 days. The staywill stand vacated if the appeal is notdisposed off by the Tribunal within thespecied time period of 365 days.

The government has introduced aone-time scheme called the voluntarycompliance encouragement schemeto give the benet to tax defaulters.The scheme can be availed of byspecied persons after making truthfuldeclaration of all pending tax duesfor the period 1 October 2007 to 31December 2012 and subject to theconditions prescribed. The scheme isnot available to assessees to whom anynotice or an order of determination has

been issued as on 1 March 2013.


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Major pre-budget

expectation of theoil and gas industry

Chapter 4

Direct tax

Upstream

Income tax holiday undersection 80-IB(9) of the IncomeTax Act, 1961 (the Act)

A tax holiday of seven years wasallowed for undertakings engaged in theproduction of mineral oil. The FinanceAct, 2011, had inserted a sunset clausestating that this tax holiday would notbe available to blocks licensed under acontract awarded after 31 March 2011.

This amendment has effectivelywithdrawn the tax-holiday incentive for

production of mineral oil in respect ofblocks licensed under contracts awardedafter 31 March 2011.

The amendment will lead to an increasein the cost of mineral oil production,since the operator will pass on the burdento downstream companies. This mayultimately have a cascading effect onthe economy.

Since blocks under the ninth round ofbidding under the New ExplorationLicensing Policy (NELP IX) are to beawarded after 31 March 2011, the income

from mineral oil production in blockslicensed under the NELP IX will not qualifyfor a tax holiday. This amendment is notin line with the promises made by thegovernment while inviting bids underthe NELP-IX, since the bid documentspecically mentioned the availability ofa tax holiday. Thus, such withdrawal isclearly retro-active in nature and couldlead to litigations, which could havebeen avoided.

The government was expected to declarethat the sunset clause would be applicable

to contracts awarded subsequent toNELP IX, so that undertakings engagedin mineral oil production pursuant tocontracts awarded under NELP IX qualifyfor a tax holiday.

Income tax holiday undersection 80-IB(9) on income fromproduction of natural gas

The income tax department is adopting anarrow interpretation of the tax holidayprovisions of section 80-IB(9) and statesthat tax holiday is available only ifexploration results in the striking of crudeoil. Further, it consequently states thatprots made on the sale of gas, where gasis struck, are not eligible for income taxholiday.

The Finance Minister, during thediscussion on the Finance Bill, 2008, gaveassurances that the benet of section 80-IB(9), as nally interpreted by the courts,

would be applicable to all exploration andproduction contracts. The Finance (No. 2)Act, 2009, includes new clauses to clarifythat the tax holiday would be available ongas produced from blocks licensed underthe eighth round of bidding under theNELP (NELP VIII) and the fourth round ofbidding for award of exploration contractsfor the coal bed methane (CBM IV). Theinsertion of these clauses may suggest thatthe income from gas produced from theblocks other than those awarded underNELP VIII or CBM IV is not entitled to a taxholiday.

Therefore, the Union Budget 2013-14was expected to clarify that the benetof tax holiday would be available on thegas produced from all the blocks awardedunder NELP/CBM or in any other mannerby central or state governments.

Availability of tax holiday toeach well

As per legal pronouncements and thegeneral provisions of the Act, eachwell can be considered as a separate

undertaking for the purpose of a taxholiday under section 80IB(9). However,the Finance (No. 2) Act, 2009, hasamended the provisions of the Act toclarify that all blocks licensed under a

single contract, awarded under NELP or inpursuance of any law for the time being inforce or awarded by the central or a stategovernment in any other manner, will be

treated as a single undertaking for thepurpose of claiming a tax holiday undersection 80IB(9). This amendment hasvirtually overturned previous cases thatwere ruled in favour of the assessee, bymaking retrospective legal amendmentsto rewrite the law from FY 1999-2000 andpre-judging matters pending in courts andtribunals. These changes are detrimentalto the nation's energy security and alsocause hardship to taxpayers who haveacted upon the pre-amendment provisionsof the Act.

Therefore, we expected section 80-IB(9)to be amended so that each well or clusterof wells is dened as an undertaking forthe purpose of availing a tax holiday.Alternatively, the section could beamended such that each distinct elddevelopment evidenced by a separatedevelopment plan is dened as anundertaking.

If, at all, the term undertaking is to bedened to reect a change in governmentpolicy with regard to the oil and gas sector,the government was expected to issue aclarication that such change will becomeeffective only on prospective basis, i.e.from FY 2009-10.

Site restoration fund undersection 33-ABA of the Act

Section 33-ABA provides for deductionof the amount deposited in the siterestoration fund scheme, subject to theceiling of 20% of the prots. Due toenvironmental concerns, site restorationor abandonment is increasingly attractingthe attention of governments worldwide.

Thus, it was expected that the ceiling of20% would be either removed or increasedto 50%.


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Further, considering most of theitems required for site restoration orabandonment are imported and there aremany foreign companies operating in theIndian exploration and production (E&P)sector, it was expected that the contractorwould be allowed to maintain the fund inUS dollars, in addition to the rupee depositallowed at present. This would help inavoiding currency uctuation risk.

Tax holiday for E&P companiesto be enhanced to 10 years fromseven years and exibility tochoose the period of 10 years outof the initial 15 years

The tax holiday under section 80-IB(9)is available to E&P companies for sevenconsecutive years starting from the year inwhich commercial production commences.The period of seven years is less than the taxholiday period available to companies in theinfrastructure sector. Furthermore, duringthe initial seven years, companies have largeexpenditure to set off, due to which they are

unable to enjoy the actual benet of the taxholiday.

Like the infrastructure industry, the E&Pindustry is also highly capital-intensive andhas a long gestation period. Thus, it wasexpected that the provisions of section 80-IB(9) would be amended to extend the taxholiday from seven to 10 years and to allowexibility to E&P companies to choose theperiod of the tax holiday any time duringthe initial 15 years from the commencementof commercial production.

Deduction under section 80-IA forinfrastructure development onsolar or wind power project to beextended from 31 March 2013 to31 March 2016

The benet is available under section80-IA(4) (iv) to set up in India for thegeneration or generation and distributionof power if it begins to generate power anytime during the period beginning 1 April1993 and ending 31 March 2013.

In order to promote the renewable energy

generation, the tax benet extended topower generation plants through section80IA of the Act was expected to be extendedfurther. The period for commencementof generation of power was expected to beextended to 31 March 2016.

Exemption from minimumalternate tax (MAT) under section115-JB

The production of mineral oil and naturalgas has been given a tax holiday undersection 80-IB(9). However, this provisionhas been nullied to an extent by theprovisions of MAT under section 115-JB.These companies normally earn higher bookprots in the initial years after commercialproduction begins, since the tax deductionsin respect of accumulated exploration and

drilling expenditure are allowable in theyear in which the commercial productioncommences. Therefore it was expected thatthe production of mineral oil and naturalgas would be exempt from MAT undersection 115-JB of the Act.

Weighted deduction in line withresearch and development (R&D)expenses under section 42

Section 42 of the Act allows deductions inrespect of capital and revenue expenditure

actually incurred by the assessee for drillingand exploration activities. Explorationand production of mineral oil is a capital-intensive and high-risk business. Therefore,weighted deduction of 150% of all capitaland revenue expenditure incurred on E&Pwas expected to be allowed under section42 of the Act. Presently, 100% of theexpenditure incurred on E&P business isallowed as a deduction under section 42.

Weighted deduction on R&Dactivities for bio-fuels

To encourage R&D initiatives by theindustry and to make R&D an attractiveproposition, the Finance Bill, 1997,introduced a sub-section (2AB) in section 35of the Act allowing a deduction of 200% ofthe expenditure. However, such expenditureneeds to be approved by the prescribedauthority (Secretary, DSIR).

In order to promote investment orR&D initiatives for renewable or non-conventional energy sources, it wasexpected that any expenditure incurred onbio-fuel activities would also qualify for a

deduction of 200% under section 35(2AB)of the Act.

Deduction for infructuous orabortive exploration expensesunder section 42

Typically, the provisions of the production-sharing contract do not require the areato be surrendered as a prerequisite forclaiming the deduction of unsuccessfulexploration cost. However, under section42 of the Act, a deduction for infructuousor abortive exploration expenses is notallowed until the area is surrendered,even though the expenses are already

charged off in the books of accounts as perthe companys accounting practices. As aresult of the requirement of surrenderingthe area prior to the commencement ofcommercial production, the assessee is notable to avail the deduction of expenses onaccount of abortive exploration in the yearwhen expenditure is incurred.

It was expected that the requirement tosurrender the area would be deleted fromsection 42(1)(a) and that the deductionwill be allowed from the year in which thearea is abandoned as abortive.

Further, we also expected a claricationby inserting a proviso in section 42that taxpayers will be eligible to claimdeduction for exploration expenses(including survey expenditure) anddrilling expenses in the year of incurrenceagainst other business income irrespectiveof whether or not commercial productionhas started (as the position is not clearfrom section 42).

Midstream

Investment-linked incentiveunder section 35AD

The benets of investment-linked taxholiday are provided only to the cross-country natural gas, crude or petroleumpipeline network for distribution, withstorage facilities being an integral part ofsuch network.

Since pipelines have several distinctadvantages over other modes of transport,it was expected that this benet wouldbe extended to intra-city and intra-state gas distribution networks used

for transporting natural gas, and it wasexpected that the Indian government, byway of an amendment to the Act, woulddene the term cross-country in relationto the gas distribution network


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Amendment in section 35AD

Under the existing provisions of section35AD of the Act effective 1 April 2010,investment-linked tax incentive isprovided by way of allowing 100%deduction in respect of any expenditureof capital nature (other than on land,goodwill and nancial instrument)incurred wholly and exclusively, for thepurposes of the specied business.

Such specied business include thebusiness of laying and operating a cross

country natural gas or crude or petroleumoil pipeline network for distribution,including storage facilities being anintegral part of such network.

Benet under section 35AD of Act isavailable only to the oil and gas pipelinesthat are approved by the Petroleum andNatural Gas Regulatory Board (PNGRB)and notied by the central governmentin the ofcial gazette and have commoncarrier capacity as per the PNGRBregulations.

As crude oil pipelines and the dedicatedpipelines, which are dedicated for supplyof petroleum products to a specicconsumer, are outside the ambit of thePNGRB Act, the benet under section35 AD is not available to such pipelines.Therefore, inadvertently, the benet to oiland gas pipelines made available undersection 35 AD of the Act is not actuallyavailable to crude oil pipelines and thepipelines dedicated to supply of petroleumproducts to a specic consumer.

It was expected that conditions undersub-clause (b) and (c) of clause (iii) of

sub-section (2) of section 35 AD of theAct, regarding approval of the PNGRBfor specied business and availability ofcommon carrier capacity as per PNGRBregulations may be waived for crude oilpipelines and the pipelines dedicated tothe supply of petroleum products to aspecic consumer.

Weighted deduction undersection 35AD to cross-countrypipeline network

Under section 35AD of the Act,100% deduction in respect of capitalexpenditure incurred (other than land,goodwill and nancial instrument) priorto commencement of operation of thespecied business to the assessee engaged

in laying and operating a cross-countrynatural gas, crude oil or petroleumpipeline network for distribution isallowed.

Section 35AD (1A) inserted by theFinance Act, 2012, provided that wherethe specied business is of the naturereferred to in the following sub-clauses ofsub-section 8(c) of section 35AD, and hascommenced its operations on or after 1April 2012, deduction of an amount equalto 150% of the expenditure under section35AD (1) shall be allowed.

Setting-up and operating a cold-chainfacility

Setting up and operating awarehousing facility for storage ofagricultural produce

Building and operating, anywhere inIndia, a hospital with at least 100 bedsfor patients

Developing and building a housingproject under a scheme for affordablehousing framed by the centralgovernment or a state government,

as the case may be, notied by theCentral Board of Direct Taxes (CBDT)in this behalf in accordance with theguidelines as may be prescribed

Production of fertiliser in India

A similar deduction of 150% was expectedto be allowed under section 35AD to thespecied business of laying and operatinga cross-country natural gas, crudeoil or petroleum pipeline network fordistribution, including storage facilities,since this is an integral part of such

network, covered under sub-clause (iii)of sub-section 8(c) of section 35AD of theAct and as allowed to the other speciedbusinesses mentioned above.

Removal of restrictions forset-off of losses for speciedbusiness of section 35AD

Section 70 provides that in case of lossunder any head of income (other thanhead of capital gain), the assessee isentitled to set off such loss from any othersource of income under the same head.

Therefore, the loss from one businesscan be set off from the prots of anotherbusiness.

However, section 73A provides thatloss computed under sec 35AD will beset off only against prots and gains of


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specied business, which inter alia includesthe business of laying and operating across-country natural gas (laid after 01April 2007) or crude oil or petroleumpipeline network for distribution, includingstorage facilities being an integral part ofsuch network. This restricts the claim foradjustment of loss from prots of otherincome, which is allowed in all other cases.

In the initial three to four years, there maybe no prot in the specied business of anassessee. Therefore, section 73A appearsto be restrictive and unfair to the assessee.There was an expectation of an amendmentallowing the set-off of loss under section35AD against prots of any other businesscarried on by the assessee.

Further, section 72A was expected tobe amended suitably so that in case ofamalgamation or demerger of a companyaccumulated loss in specied business(under section 35AD) of amalgamatingcompany or demerged company shall:

1. where such loss of specied business(under section 35AD) is directlyrelatable to the undertakings transferredto the resulting company, be allowedto be carried forward and set off in thehands of the resulting company; and

2. where such loss of specied business(under section 35AD) is not directlyrelatable to the undertakings to theresulting company, be apportionedbetween the demerged company andthe resulting company in the sameproportion in which the assets of theundertaking have been retained by thedemerged company and transferred tothe resulting company, and be allowed

to be carried forward and set off in thehands of the demerged company or theresulting company, as the case may be.

Infrastructure status to LNGprojects for the purpose of taxholiday

At present, there is a huge requirement ofnatural gas to meet the requirements of citygas distribution networks, reneries andthe power sector. Therefore, it was expectedthat in order to promote the import of LNG,

LNG facilities located at port would beincluded in the denition of infrastructurefacility for the purpose of tax holidayunder section 80-IA and the benet may beextended for next ve years.

Downstream

Full depreciation allowancefor projects undertaken forupgradation of fuel quality

As per section 32 of the Act, assessesengaged in a business or profession areallowed the depreciation allowance inrespect of assets used in the business orprofession. Rule 5 of the Income Tax Rulesalong with Appendix 1 provides for therate of deprecation on various categories of

assets. As per this rule, 100% depreciationallowance is admissible in respect of air orwater pollution control equipments. Also,Appendix 1 provides the list of equipmentthat are eligible for 100% depreciationallowance.

As per the auto fuel policy, the governmenthas directed oil companies to provide high-speed diesel (HSD) with maximum sulphurcontent of 0.035% (BS-III) and 0.005%(BS-IV) effective 1 October 2010 throughoutthe country. In order to full this criterion,oil reneries are required to make a huge

capital investment to undertake necessarychanges.

Since this upgradation exercise helps toreduce the air pollution, the expenditureincurred on this was expected to be madeeligible for 100% depreciation undersection 32.

Extension of the sunset clausebeyond 31 March 2012 for taxholiday under section 80-IB(9) forundertakings engaged in reningof mineral oil

A seven-year tax holiday is available toundertakings engaged in rening of mineraloil, which begin such rening on or after 1October 1998 but not later than 31 March2012. Thus, reneries which will begin therening of mineral oil after 31 March 2012are not eligible for tax holiday.

Several reneries are expanding rapidlyand are planning new capacities duringthe 12thFive Year Plan (20122017). Thetax concession enables a reduction inunder-recoveries and encourages further

investment.Therefore, it was expected that the sunsetclause will be extended so that the reneriesthat will begin rening of mineral oil after31 March 2012 will also be eligible for thetax holiday.


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Deduction under section 80-IB(9):Income from government subsidyand discount on LPG/SKO fromupstream companies to be treatedas income from the business of theundertaking

The Government of India deregulated theprices of petrol, diesel, superior kerosene oil(SKO) and liqueed petroleum gas (LPG),and the prices were to be based on ratesprevailing in international market.

The increase in input cost normally leads toan increase in the selling price of the output.However, due to volatile behaviour of pricesof petroleum products in internationalmarket, particularly diesel (HSD), SKO andLPG, in spite of deregulating these products,the government of India did not permit oilmarketing companies to raise the sale pricein line with the prices prevailing in theinternational market.

As per the governments directives, oilmarketing companies are required to selldiesel and SKO meant for public distributionsystem (PDS) and large quantities of LPGused for domestic consumption, to theconsumers at the price xed by the Ministryof Petroleum and Natural Gas.

The sale price of such products is lowerthan even the raw material cost. This resultsin operating losses for the oil marketingcompanies. Under the circumstances, theMinistry, from time to time, provides asubsidy to recoup the under-recovery of saleprice. Similarly, oil marketing companiesare also allowed subsidy and discounton purchase of SKO/LPG from upstreamcompanies.

Some tax authorities took the view thatgovernment subsidy and discount cannotbe said to be derived from the business ofthe undertaking rening mineral oil andtherefore such income is not eligible fordeduction under section 80-IB(9).

This government subsidy and discountreceived by the PSUs are nothing butrecovery of part of the sale price of productssold to customers at discounted price.Therefore, subsidy and discount should beconsidered as derived from the business ofundertaking rening mineral oil.

In view of the above, it was expected that aclarication would be provided that subsidyand discount received by public sectorundertakings on purchase of SKO/LPG fromupstream companies would be regarded

as income derived from the businessof undertaking and will be eligible fordeduction under section 80-IB(9).

Interest under section 234B and234C exemption to oil companies

As per the provisions of Act, interestunder section 234B is applicable when anassessee who is liable to pay advance taxhas failed to pay such tax, or an assesseewho has paid advance tax, but the amountof advance tax paid by him is less than

90% of the assessed tax. Interest undersection 234C is chargeable when theassessee defers the payment ofadvance tax.

Presently, the oil industry determines theprices of the products on the basis of themarket-driven pricing mechanism, whichis nowadays facing wide uctuations inthe prices of input material such as crudeoil and resulting in the volatility of pricesof the products. So it is very difcultfor oil marketing companies (OMCs) todetermine the projected prots for the

nancial year although every effort istaken to estimate the prots near to actual.

Similarly, the timing for issuance of oilbonds or cash subsidies for the purpose ofpartial recovery of losses suffered on SKO,HSD and LPG (domestic) is done aftera long period of time after actual salestakes place. This difference in time lagputs additional constraint on the OMCs toestimate the prots nearer to the actual.

Thus, shortfalls occurring in respectof payment of advance tax are notintentional but a result of the uctuation

of prots due to various reasons beyondthe control of the OMCs.

It was expected that the governmentwould consider the situation anddifculties that the companies are facingand would take appropriate steps toprovide the specic exemption fromapplicability of provisions of these sectionsor provide some relaxation in the paymentof advance tax so that undue hardshipfaced by the OMCs can be reduced tosome extent.

Deduction for Expansion and up-gradation of reneries

GDP growth of around 8% as envisagedin the 12thve-year plan will require anincrease in energy availability across the

country. Plans for faster and inclusivegrowth will result in higher consumptionof energy, which will entail infrastructuralpreparedness by the OMCs.

Given the large expected step-up infuel demand, the OMCs are required toreinforce their infrastructure in terms ofcapacity augmentation and fuel-qualityupgradation in line with environmentalnorms. Needless to say, commensurateinvestments will be required forsupporting the expansion.

The government, in an attempt to protectthe common man from the volatility anductuations of crude prices, has beencontrolling the prices of sensitive productslike petrol, HSD, SKO and LPG resultingin huge losses to OMCs. The gap betweenthe costs and sales realisation is partiallycompensated through discounts fromupstream PSUs, cash and bonds from thegovernment resulting in varying amountof under-recoveries being absorbed bythe OMCs, leading to unpredictability inthe prot levels of the OMCs. In additionto the under-recoveries, there is an

additional impact on the protability onaccount of increased interest costs dueto delay and uncertainty in receivingcompensations, delay and loss onliquidating the bonds, etc. As a result, theborrowing capability of these companies,to support above investments and meetworking capital requirements, also getsmarginalised.

In order to sustain the existence and tobe a part of the inclusive growth plans ofthe nation, it was expected that either aprot-based or investment-based incentive

would be provided to OMCs for expansionand upgradation of their reneries.

Service providers

Clarication that the incomeof oil and gas service providersshall not be chargeable toincome tax at 10% on grossbasis and will be eligible forpresumptive tax regime

Section 44BB provides for presumptive

taxation of income earned by a non-resident engaged in the businessof providing services or facilities inconnection with, of supplying plant andmachinery on hire used or to be used,in the prospecting for, or extraction or


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production of mineral oil. Such income istaxable at 10% of the gross sum paid orpayable to such non-resident.

Section 44DA separately provides that thefee for technical services (FTS) or royaltyincome earned by a non-resident havinga permanent establishment (PE) in Indiashall be taxable on net income basisat 40%.

The denition of FTS as providedunder the Act categorically excludesthe consideration for any mining or like

project. Instruction no. 1862 issued bythe CBDT on 22 October 1990 states thatthe expression mining project or likeproject would cover the services renderedfor exploration or exploitation of oil andnatural gas. Thus, the consideration forsuch services will not be treated as FTSunder section 9(1)(vii) and payment willbe taxed under section 44BB of the Act.

The scheme of presumptive taxation undersection 44BB has been amended by theFinance Act, 2010, to exclude the incomereferred to in section 44DA (i.e. royalty orFTS) earned by a non-resident having a PEin India. A corresponding amendment hasalso been made in section 44DA to providethat section 44BB shall not apply inrespect of the income referred to in section44DA of the Act.

Considering that the services rendered bythe oil and gas service providers do not fallwithin the denition of FTS as providedunder section 9(1)(vii) of the Act, theamendment shall result in unnecessarylitigation with the tax authorities. Theintention behind the presumptive taxationscheme was to simplify the determination

of income of the non-resident who isproviding services or facilities to oil andgas sector. This rationale still holds good.

Therefore, it was expected that thegovernment would issue a clarication tothe effect that the instruction no. 1862 willcontinue to apply to all services renderedin connection with the prospecting for, orextraction or production of, mineral oil sothat the benet of presumptive taxationwill continue to be available to suchservice providers.

Indirect tax

Service tax

Levy of service tax on productionsharing contracts (PSC)

Typically, the government and privateoil companies enter into PSCs, wherebythe government retains ownership of thepetroleum produced and the oil companiesassume the exploration risk. Frequently,instead of one oil company entering into

a PSC, three to four companies form anunincorporated consortium, which jointlyenters into a PSC with the government.One of the oil companies acts as a leadconsortium member and raises cashcalls on the other members to meet theoperating expenses.

Section 65B (44) of the Finance Act,1994 (as amended) denes the termservice. As per explanation 3 of thedenition of service, an unincorporatedassociation or a body of persons, and amember thereof shall be treated as distinct

persons. By virtue of this explanation,the service tax authorities are demandingservice tax on the cash calls between themembers of the consortium on the basisthat the association of persons (AoP)and members are distinct persons. Thus,there is a great degree of ambiguityregarding applicability of service tax ontransactions, between the members andthe unincorporated joint ventures (UJVs).Examples include supply of manpower andother resources by members of the UJVand recovery of proportionate expensesincurred by UJV from its members. Such

an interpretation is harming the sectoras service tax is levied in the absence ofprovision of any services.

Recommendation:It is expected thata clarication be issued to the effect thatmere cash transactions between membersand UJVs and between the members inter-seshall not qualify as services; hence, itwill not be leviable to service tax.

Exemption from service taxon input services consumed byE&P companies in relation toexploration and productionactivities

Exemption from service tax on inputservices consumed by E&P companies hasbeen a recurring demand of the oil andgas sector. The recent shift in the taxationof services from select services to allservices has further increased the servicetax burden on this sector. The sector has

been exempted from paying CENVAT orservice tax on the output leg on crudeoil and natural gas production. This hasresulted in a break in the credit chainwhich has increased the operating costsfor the exploration companies. Hence,the service tax paid on the procurementof taxable services by E&P companies is asticking cost.

Recommendation:It is recommendedthat in line with the other concessions thecentral government should exempt theinput services consumed by the E&P sector

from the levy of service tax. Alternatively,the possibility of refunding the service taxpaid on input services consumed by theE&P sector may also be considered.

Exemption from payment ofservice tax on transportation ofpetroleum products by road orpipelines

Transportation of petroleum andpetroleum products by rail or vessel fromone place in India to another are exempt

from the levy of service tax. However, nosuch service tax exemption is availablewhen the transportation of petroleum orpetroleum products takes place throughroad or pipelines. Also, the selling priceof petroleum products being controlledby the government, the oil companies donot have the ability to recover the servicetax so paid on the freight charges. Thus,the service tax on transportation activitiesvia road or pipelines becomes a cost in thehands of oil companies.

Recommendation:It is recommendedthat the exemption from payment ofservice tax on transportation of petroleumproducts via rail or vessel should beextended to transportation of these goodsthrough road and pipelines.


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Service tax on recoveries madeby an employer from employee

Services provided by an employee to anemployer in relation to the employmenthas been kept outside the purview ofservice tax. It is common for companiesto provide certain facilities or benetsto their employees and recover a tokenamount from them for such facilities.

Within the present framework of servicetax, the token amount recovered by theemployer from its employees is subjectto service tax. Taxing these perquisiteswhich are provided as an integral part ofemployment is not only irrational but alsoresults in double taxation in the handsof employees as it would be subject toindirect tax as well as income tax. Thisalso poses a challenge in compliances(in the form of registration and otherprocedural requirements) especially forcompanies who do not have any otheroutput service tax or CENVAT liabilityexcept the service tax on these facilities orbenets to employees.

Recommendation:It is recommendedthat the government should carve outservice tax exemption on services providedby employer to its employees on similarlines as provided for services renderedby employees to its employer during thecourse of employment.

No benet of service tax paid onamounts written off as bad debts

Rule 6(3) of the Service Tax Rules,1994 provides for adjustment of servicetax already paid if the services are not

provided by the service provider. However,there is no corresponding provision forservice tax adjustment when the amountis written off as bad debts. As the amountswritten off as bad debts affect the cashows of the assesses.

Recommendation: It is recommendedthat suitable amendment should be madeto service tax rules to provide for servicetax adjustments for amounts written off asbad debts.


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Service tax payment undermodied reverse chargemechanism

Effective 1 July 2012, the concept ofreverse charge mechanism (modiedreverse charge) has been made applicableto select domes

Documents

Oil and Gas Budget