Stung by rejection of its demand for restoration of tax breaks on production of natural gas, the Oil Ministry has asked the Finance Ministry to let courts decide if 7-year tax holiday should apply only to oil and not on gas produced from the same well.
Oil Secretary S Sundareshan has asked Revenue Secretary Sunil Mitra to allow profit-linked incentives to continue for existing contracts signed under the New Exploration Licensing Policy (NELP) since 1999 under the proposed Direct Tax Code (DTC).
The government promised exemption from payment of Income Tax on profit made from production of crude oil and natural gas for seven years from areas awarded under NELP. But the then Finance Minister P Chidambarm amended the tax act to say the exemption was available to a product with huge carbon footprint (oil) and not to environment friendly fuel (gas).
Some firms like Niko Resources of Canada and Cairn India have challenged the amendment made in 2008 in courts.
"For contracts already awarded, it may be left to judiciary to decide whether there exists a notional bifurcation of mineral oil from natural gas," Sundareshan wrote to Mitra on August 9.
On June 30, Mitra had written to him saying the tax breaks cannot be extended to the forthcoming 9th round under NELP.
"As Government has consistently agreed to provide the seven years tax holiday, it may not be appropriate to deprive the benefit for companies under contracts which already exist," Sundareshan wrote.
The DTC proposes to withdraw profit linked deductions for all industries, including the benefit available to hydrocarbon sector under Section 80IB(9).
"In the event that the existing companies are denied the seven year tax holiday on the ground of the pronouncements in the Finance Act 2008 and Finance Act 2009, the companies may have an option to invoke the fiscal stability clause of Production Sharing Contract," he said.
As agreed in the discussion papers of DTC, "profit-linked incentives and other tax incentives allowed under the Income-tax Act, 1961 should be allowed to continue under proposed DTC for the existing contracts", he said.
Sundareshan wanted a new rule be inserted in the Eleventh Schedule of DTC to protect oil companies interest.
"Nothing contained in this Schedule shall apply to blocks allotted under a PSC signed with Central government before commencement of the DTC and such blocks shall continue to enjoy profit based tax holiday as detailed under Sectionn 80IB of the Income Tax Act, 1961," said the para suggested by him.
