BUDGET MEMORANDUM HAS INTRODUCED SUNSET CLAUSE FOR 100% TAX EXEMPTION FOR MINERAL OIL REFINING, POST ’09
INVESTMENTS by oil refiners in new refinery projects could be in jeopardy after the latest Union Budget, which has a provision that strips new refinery projects of income tax benefits. As things stand, a petroleum refinery is eligible for 100% income tax exemption for the first seven years of its operation. The Budget memorandum has now introduced a Sunset clause for 100% tax exemption for refining of mineral oil, if the project starts after April 2009.
This means the new refineries will no longer enjoy the I-T benefits, under Section 80-IB of the Income-Tax Act that other projects have had. If implemented, the provision could grossly reduce the return on capital and increase the payback period for new refinery projects. SV Narasimhan, finance director of India’s largest petroleum refining company Indian Oil, expressed concern over the development. “The removal of tax benefits is a big concern for the industry. Considering the huge investment needed in setting up a re finery, these incentives were essential for their economics to work out well We plan to take up this issue with the government at the earliest to restore these benefits,” he said. Industry sources said the move could impact new investments in the business.
Among those facing the heat imme diately will be Bharat Petroleum’s Bina refinery and the Hindustan Petroleum Mittal joint venture refinery at Bhatin da. The Rs 10,500-crore Bina refinery is expected to be completed by December 2009, while the Bhatinda refinery is scheduled to commence operations only by end of 2010. Both will not be el igible to claim tax benefits. However Reliance Petroleum’s 27-million-tonne new refinery at Jamnagar is luckier, as it is on schedule to commission opera tions by December 2008.
Tax consultants Ernst & Young ac knowledged the problem in their re port on the Union Budget 2008. The report said, “The removal of tax holi day on refining will adversely impact new refinery projects.” Tax holiday claims for production of natural gas could also be questioned in the future the report said.
The Budget has actually proposed a new provision in sub-section (9) of Sec tion 80-IB, to provide that no deduc tion will be allowed to a mineral oil re finer if they begin operations after April 2009. However, confusion exists with the same Budget memorandum re defining the words ‘mineral oil’. Ac cording to the memorandum, “For the purpose of this section, the term ‘min eral oil’ does not include petroleum and natural gas, unlike in other sections of the Act.” In the absence of any clear un derstanding as to what ‘mineral oil would mean if not petroleum crude most of the refiners are convinced that their new projects will get hit. Howev er, one public sector refiner said the de velopment does not apply to the petro leum refining sector.
OIL’S NOT WELL
Currently, a petroleum refinery is eligible for 100% I-T exemption for the first 7 years of operation
This means the new refineries will no longer enjoy the I-T benefits, under Section 80-IB of the Income-Tax Act
Among those facing the heat immediately will be Bharat Petroleum’s Bina refinery and the Hindustan Petroleum-Mittal joint venture refinery at Bhatinda
However, Reliance
Petroleum’s 27-million-tonne new refinery at Jamnagar is luckier, as it is expected to be commissioned by Dec ’08
INVESTMENTS by oil refiners in new refinery projects could be in jeopardy after the latest Union Budget, which has a provision that strips new refinery projects of income tax benefits. As things stand, a petroleum refinery is eligible for 100% income tax exemption for the first seven years of its operation. The Budget memorandum has now introduced a Sunset clause for 100% tax exemption for refining of mineral oil, if the project starts after April 2009.
This means the new refineries will no longer enjoy the I-T benefits, under Section 80-IB of the Income-Tax Act that other projects have had. If implemented, the provision could grossly reduce the return on capital and increase the payback period for new refinery projects. SV Narasimhan, finance director of India’s largest petroleum refining company Indian Oil, expressed concern over the development. “The removal of tax benefits is a big concern for the industry. Considering the huge investment needed in setting up a re finery, these incentives were essential for their economics to work out well We plan to take up this issue with the government at the earliest to restore these benefits,” he said. Industry sources said the move could impact new investments in the business.
Among those facing the heat imme diately will be Bharat Petroleum’s Bina refinery and the Hindustan Petroleum Mittal joint venture refinery at Bhatin da. The Rs 10,500-crore Bina refinery is expected to be completed by December 2009, while the Bhatinda refinery is scheduled to commence operations only by end of 2010. Both will not be el igible to claim tax benefits. However Reliance Petroleum’s 27-million-tonne new refinery at Jamnagar is luckier, as it is on schedule to commission opera tions by December 2008.
Tax consultants Ernst & Young ac knowledged the problem in their re port on the Union Budget 2008. The report said, “The removal of tax holi day on refining will adversely impact new refinery projects.” Tax holiday claims for production of natural gas could also be questioned in the future the report said.
The Budget has actually proposed a new provision in sub-section (9) of Sec tion 80-IB, to provide that no deduc tion will be allowed to a mineral oil re finer if they begin operations after April 2009. However, confusion exists with the same Budget memorandum re defining the words ‘mineral oil’. Ac cording to the memorandum, “For the purpose of this section, the term ‘min eral oil’ does not include petroleum and natural gas, unlike in other sections of the Act.” In the absence of any clear un derstanding as to what ‘mineral oil would mean if not petroleum crude most of the refiners are convinced that their new projects will get hit. Howev er, one public sector refiner said the de velopment does not apply to the petro leum refining sector.
OIL’S NOT WELL
Currently, a petroleum refinery is eligible for 100% I-T exemption for the first 7 years of operation
This means the new refineries will no longer enjoy the I-T benefits, under Section 80-IB of the Income-Tax Act
Among those facing the heat immediately will be Bharat Petroleum’s Bina refinery and the Hindustan Petroleum-Mittal joint venture refinery at Bhatinda
However, Reliance
Petroleum’s 27-million-tonne new refinery at Jamnagar is luckier, as it is expected to be commissioned by Dec ’08
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