Private explorer Cairn India, which is being merged with parent Vedanta, could start paying tax at close to the marginal rate of 33% starting FY17, thanks to the culmination of the phased termination of a crucial tax holiday in FY12 Budget.
The tax holiday for the Mangala, Bhagyam and Aishwariya (MBA) fields, the biggest ones in Rajasthan’s Barmer block, would cease to exist from the start of the next financial year. Thanks to a seven-year investment-linked tax holiday, the effective tax rate on the company used to be steeply lower than the corporate tax rate; it was close to 4% even in FY14.
Coincidentally, the firm is being deprived of the tax relief at a time when its revenues are under pressure due to a fall in its crude oil output and lower oil prices.
The explorer’s tax expenses increased to Rs 629 crore in FY15 from Rs 418 crore in FY14. In other words, the effective income tax rate was just over 12 % in FY15. Analysts expect Cairn India tax burden (including deferred tax charge) to increase to Rs 697 crore in FY16 and shoot up further to Rs 2,269 crore in FY17, which would mark the end of the tax holiday. The tax outgo in FY18 is expected to be even higher at Rs 2,280crore, as per Kotak Institutional Equities.
“Cairn India would fall into the 33% of corporate tax bracket starting FY17,” an official in the know of the development told FE.
The effective I-T rate was higher in FY15 than FY14 mainly due to a higher deferred tax charge on increased exploration and development spend in Barmer. Reversal in site restoration costs also played a role, Cairn said in its annual report.
Tax charge for FY15 included deferred tax credit on exceptional items.
In order to make the oil and gas sector attractive to investors, the government had offered the 7-year income tax holiday, under section 80IB of the Income Tax Act, for all the blocks. However, the sop was discontinued in the Finance Bill, 2011-12, while those already enjoying the incentive were allowed to retain it till the seventh year from the start date.
In Q1FY16, the Barmer block’s output dropped 6% year-on-year to 1,79,683 barrels of oil equivalent per day (boepd) against 1,90,879 boped a year earlier. The benchmark Brent crude oil that averaged $108.7/barrel in 2013 fell to $99.45/barrel in 2014, and nosedived since June 2014 to touch a low of $46.59/barrel in January 13, 2015. The average Brent price so far during the year stands at $59.2/barrel.
Cairn sells the crude oil drilled from the Barmer block at a discount to benchmark Brent. In Q1FY16, it saw an improvement in the discount to dated Brent, which reduced from 10.5% in Q4FY15 to 9.9% in Q1FY16, fetching 0.8% higher realisation per barrel.
At the same time, the government share of profit from petroleum in the Rajasthan block increased sharply in Q1FY16 to Rs 900 crore, from Rs 400 crore in the Q4FY15. Cairn India told analysts that the rise is due to an increase in the government’s share to 40% (from 30%) in the DA-2 area or the Bhagyam field.
Cairn India reiterated its flat production guidance for FY16 (1,75,000 bpd in FY15) for the Rajasthan block, Nomura said in its July 22 note.