Happiness flows downstream, it's disappointment upstream

The upstream oil and gas industry is disappointed with the lack of response to its demands, especially when the finance minister clearly said in his Budget speech that "energy security is high on the government's agenda."

The fine print of the Budget shows that their tax burden has increased. "Service tax is now proposed to be levied on outsourced mining services in which oil and gas have been included. This will result in a significant rise in cost of operations of upstream companies," S Madhavan, executive director with Pricewaterhouse Coopers, said. "Upstream companies will now have an additional tax burden of 12.36 per cent on operations," he added.

The Budget, presented by Chidambaram in Parliament yesterday, will also bring under the service tax net all services provided under a works contract, including engineering, procurement and construction (EPC) contracts.

"The service tax will hit upstream companies as there is no pass through for the tax," said TK Ananthkumar, director (finance) at Oil India Ltd, a government-owned exploration company.

Exploration and production companies currently employ services worth Rs 3,000 crore. This will lead to a service tax payout of close to Rs 400 crore, Ananthkumar said, speaking on behalf of the industry, which has large players like Reliance Industries and Oil and Natural Gas Corporation.

"With increasing foreign participation in exploration blocks offered under the New Exploration and Licencing Policy, there is major investment slated to come in from overseas. The government now wants a share of that investment," says the Head of Research at ICICIdirect, Harendra Kumar.

Tax expert Sukumar Mukhopadhyay says the tax burden is not going to be very large, "in comparison with the investments and the profits."

"The upstream companies need to come out of their protected cells, he added.

Midstream muddle: Though the midstream (read pipeline) companies have reason to cheer, with the finance minister granting a 10-year tax holiday to cross-country natural gas pipelines, which have been given the infrastructure status, they are unsure about how it will work.

The Budget document says that companies will be eligible for tax holiday if they are "laying and operating" the pipeline. "This will qualify only Reliance and GAIL for the exemption," said an analyst.

Moreover, storage facilities will also get the tax holiday if they are an "integral part" of the pipeline system. "There is no clear description on what the word integral means," the analyst said.

And what is the definition of cross-country? There is no clarity on that either.

However, both Reliance and GAIL officials say the move is a positive one and would boost investment in the pipeline business.

Downstream delights: The refining and marketing companies are happy with the cut in excise duty, and also welcome the proposals that did not fructify "" like the proposed equalisation of Customs duty on crude oil and petroleum products "" a move which would have hit refining margins.

"A differential needs to be maintained in the import duty on crude and refined products. We are relieved that there was no equalisation," said S V Narasimham, finance director at Indian Oil Corporation.

The under-recoveries of these companies will, however, continue at about Rs 100 crore a day of which IOC's under-recoveries total about Rs 52 crore a day.

He said that IOC, which is the country's largest retailer and refiner, was losing Rs 1.24 a litre on petrol, Rs 1.52 per litre on diesel, Rs 173 on sale of every 14.2 kg LPG cylinder and Rs 12.73 per litre on kerosene sold through the PDS.