The finance ministry has rejected the petroleum ministry’s demand for giving a seven-year income tax holiday to those who win sedimentary blocks for natural gas and coal bed methane (CBM) exploration in the next round of auctions later this year.
The finance ministry is of the view that companies that strike natural gas make profits after recouping the entire cost and hence they should not be reluctant to pay tax. If there is no profit, no tax is to be paid. The ministry reckons that industries exploiting scarce natural resources do not enjoy any tax incentives in most countries; rather, they pay more taxes compared to other industries.
The decision not to extend tax breaks to future auctions may disappoint companies such as Reliance Industries, Essar, ONGC, Cairn India and Great Eastern Energy, as they won’t be able to book tax-free profits fromnatural gas and CBM produced from blocks to be licensed in the future.
Since the eighth round of auctions under Nelp and the fourth round of CBM auctions last year were given a seven-year I-T holiday in the 2009-10 Budget, the petroleum ministry wanted it for the next auctions as well, for a “level playing field,” said a petroleum ministry official.
But the finance ministry has turned down the demand, saying that if the government keeps on giving such tax exemptions, it won’t be able to reduce tax rates as planned.
“The thinking in the government is that whatever incentives are in force now will be available for the period for which they were given. After that, no more tax exemptions will be given. In any case, the new direct tax code, expected to be in force from April 2011, is expected to lower corporate tax rate to 25%,” afinance ministry official, who asked not to be named, told FE.
Foregoing tax will have negative implications for the government’s attempts to contain the fiscal deficit – the gap between receipts and expenditure, usually met through borrowing, which is estimated at 5.5% of gross domestic product this fiscal.
Besides, a tax exemption here will not help most foreign bidders for Nelp and CBM. Since India has double taxation avoidance agreements with the US , UK , Canada and most of the large European economies, they would be taxed only in one jurisdiction. “If they are taxed in India , their governments will not tax them. Similarly, if they are not taxed here, they would be taxed in their home soil,” explained the official. India has tax treaties of different kinds with 79 countries now.
The finance ministry official cited the latest example of super profit tax on mining companies proposed by the Australian government. Australia ‘s plan is to raise $9 billion a year by levying a 40% tax on the super profits of mining companies like BHP Billiton and Rio Tinto, which benefited from a recent resources boom led by demand for iron ore from Asia, particularly from China . The funds so raised will be used for lowering corporate tax from 30% to 28%, said overseas reports. After the announcement, BHP Billiton said the move would raise the total effective tax rate on the company’s profits from 43% to 57%. Overseas reports quoting industry leaders said that the mining industry there accounts for only 8% of its economy, but pays 18% of its total corporate tax income.
During the preparations for Union budget 2010-11, the petroleum ministry had asked the finance ministry to consider extending the tax holiday given to the eighth round of Nelp auction and the fourth round of CBM auction last year, to all previous Nelp and CBMauctions too. It would have benefited companies like ONGC, RIL and Essar.
