The Ministry of Petroleum and Natural Gas has recommended to the finance ministry that the 20 per cent income tax protection on funds, parked in the site restoration account by exploration companies, be scrapped.

There is also a proposal to extend the seven-year income tax holiday on profits earned from oil and gas production to 10 years as the profits are spent on recovering the huge investments made during exploration.

The oil ministry also wants the minimum alternative tax on profits from oil and gas fields to be done away with.

Under the production sharing contract signed by exploration companies with the government, every year the companies deposit a certain amount of money in a site restoration account maintained with the State Bank of India.

The funds from this account are used to restore the exploration site and its surrounding areas to their original state at the end of the contract period.

Under the Income Tax Act, exploration companies are given 20 per cent protection on the taxable income on funds parked in the restoration account. The ministry wants the entire deposit in the account to be exempt from income tax.

"Reducing the income tax deductibility to 20 per cent of the profits de-incentivises companies to deposit the money in the site restoration fund," an official in the oil ministry said. Site restoration costs, especially for offshore sites, are very high.

The oil ministry has also proposed that income tax holiday on profits earned from hydrocarbon production be extended to 10 years. "If it is not feasible to extend it to 10 years, companies should be allowed to avail the seven-year holiday period at any time within 15 years of the start of production," the government official said.

Ashutosh Chaturvedi, associate director at Pricewaterhouse Coopers, says exploration companies take almost 4-5 years from the start of production to recover the huge expenditure they incur during exploration. The oil ministry argues that giving oil companies the full benefit of the tax holiday will encourage them to invest more money in exploration.

"It is almost like granting infrastructure status with a 10-year tax holiday. However, the huge profits earned by oil companies may deter the finance minister from announcing an extension of the tax holiday," Chaturvedi said.

The upstream companies also say that MAT, which is applicable from the first year of production, should be done away with as commercial profits are not recorded in the initial years.