Budget Expectations for Oil and Gas Industry

While the 2016 budget covered some key policy issues, we are hoping for more clarity from the Union budget, which will attract more investments in the sector.

Sashi Mukundan, Head of BP India, shares his views on the budget expectations of the oil and gas industry with the upcoming 'Budget 2017' in mind. The Hindu Business line had published it.
Date: 27 January 2017

The Government has reinvigorated the oil and gas sector by announcing measures to boost the country’s sluggish output of oil and gas. This includes the new hydrocarbon exploration and licensing policy and an aspiration to increase the share of gas in the energy mix to 15%.

While the 2016 budget covered some key policy issues, we are hoping for more clarity from the Union budget, which will attract more investments in the sector.

Firstly, the confusion around service tax on royalty and profit share. Globally, royalty in a Production Sharing Contract (PSC) is merely a nomenclature for share of reward to the Government.  It is noteworthy that PSC by implication is not a service contract. Petroleum rich companies such as Iran, Iraq, Kuwait, etc. adopt a service contract regime wherein the Government pays a service fee and owns the production. In India, the Government and the oil and gas companies are actually co-venturers entitled to their respective share of production, under the PSC. Neither is the government providing any services nor is royalty and profit share deemed a service. Unlike manufacturing/telecom sectors, Service Tax on Hydrocarbon sector is a cost as no Cenvat credit is available to upstream companies. The industry, therefore, requests clarification on non-applicability of service tax on royalty and profit petroleum. Similarly, to encourage more natural gas consumption, the levy of Service Tax on Transmission Charges should be exempted.

Secondly, the issue of withholding tax orders on the sales proceeds of foreign companies in India needs to be addressed. These companies file returns, have a registered taxable presence in India, and operate in a manner similar to an Indian company. To provide a level playing field to these companies, the requirement of withholding tax order should not be applicable. 

Finally, there is a need to swiftly decide on the date of inclusion of oil and gas within the GST framework. This will help eliminate stranding of taxes paid by suppliers and the industry at different stages of the value chain, plug tax leakages and bring in operational efficiencies; and enable States and the Centre to capture their full revenue potential. As India is implementing a comprehensive GST regime, it is only appropriate that the Oil Industry Development Cess is subsumed within GST.

There is also a need to allow simultaneous exploration and exploitation of all forms of hydrocarbons in all existing contract areas and allow continuous exploration in a producing area. The government has issued a permit (with guidelines) for this to the National Oil Companies in 2013. A similar policy needs to be announced for all existing contract areas, which will fast track exploration and exploitation of shale. Unconstrained exploration in producing areas is a normal activity internationally: this is needed for the existing contract areas to encourage continuous exploration in the producing area.

The oil and gas sector is not the only focus sector under the current government’s ‘Make in India’ campaign but plays an important role in supporting major flagship programs. Amendments on the tax front and on policies encouraging activities in this sector will go a long way in attracting more investment and reducing imports.