Move on tax holiday may impact Nelp-IX bidding

The government's decision not to extend the tax holiday on exploration of oil blocks being offered in the ninth round of bidding under the New Exploration and Licensing Policy (Nelp) may impact the current bidding process, of Nelp-IX.

"It is good as it provides us clarity regarding the issue," said an official from an exploration company.

Budget 2011 proposes to remove this tax holiday for Nelp blocks awarded after March 31.

"Unless this date is extended, blocks awarded under the ongoing Nelp-IX round will not be eligible, as it is unlikely that Production Sharing Contracts for these blocks will be signed prior to March 31," said Akhil Sambhar, associate director-oil & gas practice, Ernst & Young.

In the proposed Direct Taxes Code, existing beneficiaries of the tax holiday will continue to get it when it takes effect, after April 1, 2012.

Analysts said the absence of a seven-year tax holiday for refineries in special economic zones commencing operations after March 2012 will be a negative for such refineries, like that of Essar Oil. The company is expanding its refinery to 20 million tonnes per annum.

On indirect taxes, there was an expectation that the current rate of applicable excise duty on products and customs duty on crude oil woud be brought down to help manage the increasing price, but no such reductions have been proposed in Budget 2011.

The finance minister's measure of increasing the Minimum Alternate Tax (MAT) from 18 per cent to 18.5 per cent would have a marginally negative impact on Cairn India and Reliance Industries' KG-D6 operations, which may see a cash outflow of around two per cent.

However, say sector analysts, this will be offset by the higher crude oil prices and better refining environment.

"There were wide expectations that import duties on crude and petrol products would be brought down in demonstration of management of the oil price situation. This perhaps has not been done because the decrease in duties would only have transferred the burden to subsidies to be given to oil companies," said Kalpana Jain, senior director of Deloitte in India.

While no cut in customs duty on crude oil will have a positive impact on Oil and Natural Gas Corporation, Oil India and Cairn India, no reduction in excise duty on petrol/diesel will have a negative impact on the oil marketing companies, ONGC, Oil India and GAIL.