1. Tax terrorism: Solving oil sector’s tax mess

Tax terrorism: Solving oil sector’s tax mess

Whether an ONGC, say, explores for oil and gas on its own, or whether it does this along with a Cairn shouldn’t really make a difference as far as its tax status is concerned, right?

By: | Updated: January 24, 2017 8:30 AM
 (PTI) If an ONGC, in this hypothetical example, explores for oil/gas on its own, it is not liable to pay any service tax unless it farms out the work to contractors—the tax is then to be paid on the service-value of the contract. (PTI)

Whether an ONGC, say, explores for oil and gas on its own, or whether it does this along with a Cairn shouldn’t really make a difference as far as its tax status is concerned, right? Going by the rash of tax notices sent to India’s oil companies, including the state-owned ONGC, however, it makes a big difference. If an ONGC, in this hypothetical example, explores for oil/gas on its own, it is not liable to pay any service tax unless it farms out the work to contractors—the tax is then to be paid on the service-value of the contract. But if, as is industry practice, Cairn is the operator of the field and ONGC gives Cairn its share of the capex/opex—’cash calls’ in industry jargon—the amount being paid is now being subjected to a service tax. Since there is a big difference between a service contract and a production sharing contract (PSC), reportedly, the petroleum ministry has also weighed on the side of the oilcos. Since the service tax is levied only on consortiums, what this also means is that the government’s tax policy is influencing the structure of bids—non-consortiums will get a more favourable tax treatment. In order to incentivise oil exploration, all PSCs divide revenue earned into ‘cost petroleum’ and ‘profit petroleum’—each contractor/consortium is allowed to sell oil/gas to fully recover its ‘cost petroleum’, and once this is done, the balance ‘profit petroleum’ is split with the government; the tax notices received by industry include those on ‘cost petroleum’. How can the cost incurred by an oilco be considered a service rendered by the government—unless this interpretation is used, service tax cannot possibly be levied on ‘cost petroleum’?

Oilcos, similarly, argue that since even the Supreme Court has held that royalty is a tax, a service tax cannot be levied on royalties as is being done now. Whatever the final view taken on the applicability of service or any other tax, any such decision that has larger ramifications, surely, should be taken by the Central Board of Direct Taxes (CBDT) or the Central Board of Excise and Customs (CBEC) and not by individual tax assessment officers in different tax circles? In the case of treating the capital investments various startups have got in the past as routine business income, similarly, the notices came from individual officers instead of the CBDT deciding that it was all right to do this. The nature of taxation is that each circle takes its own decision, but when this has larger ramifications, the CBDT/CBEC needs to collectively weigh in as well. And when, as in the case of the oilcos, the decision affects the entire industry, a larger consultation should also include the line ministry. If this does not happen, we will constantly remain in a situation where the government tries to woo industry by claiming to frame investor-friendly policies while the industry keeps crying tax terrorism.

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