India was experiencing such large-scale natural resource development for the first time since the opening of state-owned Bombay High in the late 1970s.
Similarly, the build-up of the knotty issues across the entire energy supply chain and continued failure to resolve several and half-way resolutions for others has culminated in creating a spaghetti bowl that requires deft unravelling for reigniting development of the energy sector. Priority of resolution should be to the big three challenges: first, deciding the role of the government in the determination of highly taxed fuel prices, both for subsidy-based diesel and for domestically-produced natural gas; second, for the licensing framework for production sharing contracts; and third, putting the tax genie back into the box to end
the ongoing uncertainty and litigation.
A transparent, market-driven pricing framework is the significant policy reform which, if unveiled, could facilitate long-due and much-discussed reforms for the Indian natural gas market and finally end the misery of the downstream industry that has been locked in with controlled prices for diesel, LPG and kerosene. But it may be too optimistic to anticipate such announcement in the upcoming Budget as the incumbent government has had less than six weeks to assess the existing gas pricing framework for improvisation.
The upstream industry anticipates key announcements in the Budget, including a roadmap for the bidding of hydrocarbon acreages, either under the tenth round of the existing NELP or by transitioning to an Open Acreage Licensing Policy regime under which acreage will be available round the year instead of cyclical bidding prevalent under NELP. It will also be relevant for the government to set out an unequivocal policy framework on the existing cost-recovery based PSC regime versus the revenue-sharing model for PSC contractingthe present policy ambivalence has been a cause of concern for some of the largest E&P companies. Besides, the Uniform Licensing Policy (ULP) should enable licences, once awarded, to be extended to all fossil fuel sourcesgas, shale and coal-bed methane.
From the renewable industrys standpoint, reiteration of the National Solar Mission target of adding 20 GW of grid connected and 2 GW of off-grid capacity by 2022 and steps for strengthening the renewable energy certificates (REC) market shall be important. With a view to diversify the energy mix for meeting future demands, it is but imperative for the government to underline significance and potential of nuclear source with a clear action plan for nuclear capacity addition in the 12th Plan period.
Resolution of tax issues is a subject that seeks an immediate redress. The most significant expectation being the reintroduction of the income-tax holiday for E&P activities, sunset on which was enacted by the Finance Act, 2011, the parity for past years for natural gas as mineral oil, and the removal of the retrospective definition that tax holiday is to be taken on singular basis of PSC and not as per the concept of tax undertaking. Refiners too expect the new finance minister to mitigate the impact of removal of the tax holiday incentive (available until March 31, 2012) by providing an investment-linked tax amortisation in the identical manner as legislated for cross-country pipeline projects. It is equally necessary to clarify that seismic survey and other oilfield services rendered by non-residents are eligible for deemed profit legislations under the time-tested provision of tax laws. This is needed to bring closure to the litigation that has been provoked by the taxman whose contention has been rejected by several tax tribunals and select High Courts.
To provide a stable fiscal framework for the power sector, the government may consider extending tax holiday incentive for generation and/or distribution of power till 2020, and thus do away with the rolling tax policy which has witnessed yearly extension of such incentive, keeping the developer guessing every year.
In summary, there are a significant number of issues accumulated by the previous UPA regime that have cumulatively hampered investment and growth of energy projects in India. To rebuild early momentum and bring back clarity and certainty for investors, both domestic and foreign, it is imperative that the Budget provides impetus for carrying out the measuresdiscussed here.
Assisted by Sumit Singhania
The author (Gokul Chaudhri) is partner, BMR & Associates LLP. Views are personal