Petroleum ministry has asked the finance ministry to rework the Direct Taxes Code Bill 2010 so that oil and gas producers can continue to enjoy the existing tax breaks which are being grandfathered to their full extent.In a letter to revenue secretary Sunil Mitra after the Bill’s introduction in Parliament recently, petroleum secretary S Sundareshan has also asked for extension of the liberal tax regime for non-resident service providers in the crude oil sector to the foreign firms rendering similar services in the natural gas sector.
The DTC Bill seeks to protect the ‘tax-free profits of seven years’ allowed to hydrocarbon producers and refiners under the contracts already signed with the government for their unexpired period. But the Code also says that the computation of profits for this purpose has to be as per the provisions of the Code that will replace the existing Income Tax Act 1961. Sundareshan, in his letter, said, “… presently, exploration & production industry has the benefit of both – seven-year tax holiday as well as allowance of capital expenditure. However, under the DTC, the assessees can avail either of the two benefits and not both. This obviously would go against the principle of protection of existing benefits.”
The petroleum ministry wants the North Block to delete the provision 318 s (i) in DTC, which says computation of profits of hydrocarbon producers have to be as per the provisions of DTC, other than those relating to capital expenditure. Experts said there were changes in the DTC that make computation of profits different in the new regime. These provisions would adversely affect the planning of hydrocarbon explorers who have put in large amounts of money in the risky business, the petroleum ministry feels.
“Various changes in the DTC, 2010 make the computation of profits different from the existing Income Tax Act. This could lead to a situation where the tax benefits available are less than what is provided in the 1961 Act. Companies make their financial planning as per the income tax law that exists at the time of making the investment,” said Nabin Ballodia, director, KPMG. Ballodia said the petroleum ministry’s move appears to be intended to ensure that the benefits already committed are fully protected.
The existing law allows 100% deduction of profits from the production and refining of crude oil and from production of natural gas for seven years from the total income of an assessee subject to certain conditions.
The petroleum ministry has also told the finance ministry that the DTC should extend the benefit of presumptive taxation regime to non-resident entities providing services to natural gas exploration and production companies.
The existing law says those non-resident entities providing services to crude oil exploration companies are taxable on presumptive basis. Ten per cent of their receipts are deemed as taxable.
The oil ministry also wants the DTC to deem as expenditure any payment to the ‘Site restoration fund’ maintained by SBI to restore oil fields after their productive life.
This would encourage companies to ensure site restoration after their commercial activities.
Withdrawal from the fund is now allowed only for the purpose of site restoration. With environment issues become central to economic policy making, the oil ministry wants to continue the emphasis on site restoration after the exploration and production activities.