Oil & Gas: Win Some, Lose Some

THE BUDGET INDICATES THE government’s intention to pay the oil subsidy only in cash and not in bonds, as was the practice till last year. This will automatically put a cap on how much the government can pay and indirectly encourages market-linked prices of fuels as suggested by the Kirit Parikh committee
The Union Budget 2010-11 proved to be a mixed-bag of goodies for the domestic petroleum industry. The industry was looking for the solution for mainly two issues in the Budget — whether the government has taken any decision on Kirit Parikh committee report, and whether the anomalies created last year by excluding production of natural gas from income-tax benefits will be rectified. However, the Budget disappointed the industry on both these counts. The Budget mentioned the government’s intention to pay the oil subsidy only in cash and not in bonds, as was the practice till last year. This is a positive move for oil marketing companies that together are looking at an aggregate loss of Rs 45,000 crore for the year 2009-10
The finance minister’s decision to restore customs duty on crude oil and petroleum products to pre-July 2008 levels and increase excise duty on petrol and diesel by another Re 1 per litre were totally unexpected. Since the marketing companies immediately passed on the tax burden their finances remain unaffected. The increase in customs duty, however, is a boon in disguise for the domestic petroleum refiners as the effective rate of protection goes up and will add a few cents to the gross refining margins. In the same way, as the landed cost of imported crude oil goes up, the domestic oil producers will be able to charge a little higher and earn a better realisation. Companies, such as ONGC, Oil India, Cairn India, Reliance Industries, Hindustan Oil Exploration and Selan Exploration stand to gain marginally. The reduction in surcharge on corporate tax from 10% to 7.5% will also benefit oil companies. However, increase in the minimum alternate tax (MAT) from 15% to 18% is a negative for companies like Reliance Industries, Essar Oil and Cairn India.
The Budget has also raised the cost for the upstream E&P industry that routinely avails technical services from the foreign companies. As informed by Sanjay Grover,
partner (Oil & Gas), Ernst & Young, earlier, the fees paid for such technical services were taxable in India only if the services were both rendered and utilised in India. However, the Budget proposes to tax these fees if paid by a resident Indian, irrespective of whether rendered or utilised in India. Similarly, foreign upstream services providers having an establishment in India were assuming 10% of their net receipts as profits. However, the Budget has proposed to remove this benefit. Both these developments could have a negative impact on upsream companies and may lead to increased cost and litigation.