Ministry may seek tax sops for exploration, production cos

The exploration and production (E&P) industry in India may soon have a reason to cheer as the petroleum ministry, as part of its pre-budget consultations with the finance ministry, is likely to make a strong pitch for extending a series of tax benefits for companies undertaking E&P activities in the country. This, sources said, was being done to encourage more and more companies to invest in the country?s exploration sector.

Industry bodies like Ficci and also Association of Oil and Gas Operators have been lobbying with the government on providing tax incentives to the E&P industry. In step with the tax exemptions to companies involved in power generation and distribution, it is felt that undertakings engaged in commercial production or oil refining should be granted a tax holiday for a period of 10 years under Section 80-IA.

Service tax exemption on E&P activities, including outsourced services, is also likely to be proposed to the finance ministry. On behalf of the industry, Ficci has already recommended similar tax benefits to be granted to E&P companies.

Currently, under section 80-IB (9) of the IT Act, an undertaking, which begins commercial production or oil refining, is allowed deduction of 100% of the profits for a period of 7 years.

Such undertakings are, however, not able to avail of these tax benefits for the full tenure of 7 years, owing to the huge depreciation claims in the initial 3-4 years and more particularly due to permissible deductions under Section 42 of the Act, where all capital and revenue expenditure incurred on drilling and exploration activities is fully deductible.

It has, therefore, been proposed that undertakings engaged in commercial production or oil refining should be granted 100% tax holiday for a period of 10 years, of 15 years beginning with the year when the company starts commercial production or oil refining under Section 80-IA instead of section 80-IB, as is the case in power sector.

Alongside, service tax exemption to E&P activities, besides introduction of a provision in the foreign trade policy, for availing deemed export benefit of service tax paid is also likely to be taken up by the petroleum ministry during its consultations with the ministry of finance.