The Gujarat government-owned GSPC is considering hiving off its deep-water block (KG-OSN-2001/3) in the Krishna-Godavari (KG) Basin into a separate company, a move that will come in handy for its planned sale of majority stake in the hydrocarbon project to the Centre-owned ONGC. While the de-merger will facilitate tax neutrality for GSPC for the deal, ONGC as the buyer will practically benefit from deduction on all exploration and drilling expenditure incurred by GSPC in the block, tax experts said.
“The explorations companies are working towards making the de-merger and the acquisition comply with Section 2(19AA) and Section 42 of the Income Tax Act,” a source privy to the development told FE.
FE reported earlier that ONGC has asked Houston-based Ryder Scott to ‘independently’ review the reserves estimates in the 1,850 sq km block in the Bay of Bengal after it found that the actual hydrocarbon that could be taken out is far less than the presumed 7.6 trillion cubic feet.
The valuation of the deal, earlier pegged around $1.5 billion, would depend on the actual recoverable reserves.
Section 42 of the I-T Act allows an exploration and production (E&P) company to claim tax deduction of specified exploration and drilling expenditure incurred. The E&P company may treat this expenditure as capital work in progress to the extent remaining unclaimed because of shortage of income. Such expenditure includes infructuous or abortive exploration expenses incurred prior to commercial production, revenue and capital costs incurred for drilling and exploration whether prior or subsequent to the commencement of commercial production and any depletion of oil in the mining area post commencement of commercial production, which can be claimed in accordance with the terms of the agreement.
Ravi Mehta, partner, Grant Thornton India, said: “In the event, there is any transfer of E&P business through a scheme of de-merger -complying with the conditions stated in Section 2(19AA) of the Income Tax Act, then neither the de-merged company nor the resulting company becomes taxable for the transferred business. Also, the shareholders of the de-merged company are not taxable on the new shares received from the resulting company under the scheme, based on the approved share-swap.”
All the assets and liabilities relating to the de-merged business are transferred to the resulting company (the firm to be carved out from GSPC in this case) at its book value. The unclaimed expenses of the de-merged company under Section 42 relating to the E&P business gets rolled to the new company, which can utilise it in the same manner as the de-merged company (GSPC), had the de-merger not taken place, Mehta added.
GSPC has spent whopping Rs 14,641.92 crore till March 2015, which exceeds the field development plan target of Rs 13,122.46 crore, to develop single field of the block — Deen Dayal West (DDW). For the entire block, which has other prolific areas such as the DDW Extension and Six Discoveries, an expense of Rs 19,576 crore has been incurred till March 2015. Currently, the output from the block, which is under ‘test-production’, is hovering less than 0.5 million metric standard cubic metres per day.
GSPC is in the midst of a political storm with the Congress party alleging that the Rs 20,000 crore spent by it so far has been a waste of resources since there is very little gas in the block.