Oil & gas: Budget 2010 low on reforms, high on tax
Budget 2010 may not go down too well with the oil and gas sector. Finance Minister Pranab Mukherjee says the government will continue with its current practice of paying out oil subsidy in cash. The won’t go well with the industry, which expected a clear subsidy-sharing mechanism of cash subsidy/oil bonds and clarity on tax breaks for natural gas produced under NELP I-VII.
The oil and gas industry was keenly awaiting the Union Budget as it expected deregulation and an in increase in fuel and gas prices. There were hopes that some of the recommendations made by the Kirit Parikh committee would see light of the day. However, no such measures were announced in the Budget.
The Finance Minister has also increased the Minimum Alternate Tax to 18% from the earlier 15%. Oil exploration and production companies had sought an exemption from MAT. At present, 15% MAT is applicable on booked profits (16.995% effective). No exemption has been granted on profits earned from commercial production or refining of mineral oil which are otherwise fully exempted from income tax for the period of seven years from the levy of MAT.
To add fuel to injury, the 5% basic customs duty on crude petroleum has been restored. Moreover, central excise tax on petro products has been hiked by Re 1 while non-petro products will see a levy of 10%.
Stocks/Sector impact in Oil and Gas:
- The hike in central excise tax for refined products is negative for oil marketing companies.
- Restoration of customs on crude is negative for all refiners, particularly Reliance Industries.
- Reliance (RIL) will also be hit by the increase in MAT to 18%.
What the sector expected?
- Sought extension in the tax holiday under section 80IB to 10 years. Currently, the tax holiday is available to exploration and production (E&P) companies for seven years from the year of commercial production.
- Clarification of section 80 IB deduction on gas exploration for pre-new exploration licensing policy and NELP I-VII blocks.
- Sought exemption for transportation of petrol, diesel, and domestic LPG through road and pipeline from the purview of service tax.
- Sought reduction in import duty on two basic feedstocks – naphtha and propane – from 5% to nil.
- Removal of custom duty on liquified natural gas. The move will reduce the price for end users and thus improve its marketability. Petronet LNG, GAIL, and Gujarat State Petronet are the major beneficiaries.
- Sought declared goods status for natural gas. At present, there is no uniform sales tax rate for natural gas sold. By adding it to the list of declared goods under section 14 of the Central Sales Tax Act, it will help reduce incidence during inter-state trade. The move will benefit end user industries like power and fertiliser.
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Category: Budget
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