Tax sops: Oil ministry approaches FinMin

The petroleum ministry has asked the finance ministry for clarification on the proposal to withdraw the 7-year income tax holiday on production of oil and gas with effect from April 1 this year.

The finance ministry, in the explanatory memorandum to the Finance Bill 2008-09, proposes to withdraw the tax holiday which has been a window the petroleum ministry has been using to market the oil and gas exploration blocks under the New Exploration and Licensing Policy (Nelp) since 1999.

The commitment to give a 7-year tax holiday to companies producing gas from Nelp blocks was finalised by the Union Cabinet after consultation with the finance ministry, said a senior official in the petroleum ministry.

"The proposal to withdraw the tax benefit came without consultation with us, or with the Cabinet," said the oil ministry official.

The tax holiday is not explicitly mentioned in the production-sharing contract that is signed with operators of oil and gas block offered under Nelp. For Nelp blocks the government in the Notice Inviting Offers (NIOs) for the auction commits to give the companies an income-tax holiday for seven years from the day production begins.

The companies have been seeking extending the 7-year period to 10 years, or the flexibility to include the seven years over a period of 15 years from the day production begins.

The Directorate General of Hydrocarbons (DGH), the body in charge of Nelp auctions, is still advertising the tax holiday in its presentation to prospective bidders in the seventh round of Nelp (Nelp VII) despite finance ministry officials saying the tax holiday will be withdrawn.

The Nelp VII auctions are expected to bring in investments of $3.5-8 billion for the 57 blocks on offer. The petroleum ministry expects bids from global oil majors which have kept away from previous auctions.

"The production-sharing contracts are based on the NIOs, and the tax holiday is an integral part of the NIOs," said a senior official in the petroleum ministry, adding that the clarifications were expected to come before the bid submission date for Nelp VII closes on April 25.

VK Sharma, managing director of Tata Petrodyne, the Tata group's oil and gas exploration company, said lack of clarity on the tax holiday was a "big issue" as the deadline to the last date of submission of bids for Nelp VII was just over a month away.

"The finance ministry has the last say. The financial implications are likely to be huge," he said.