The petroleum ministry has taken up the cudgels against Finance Minister P Chidambaram for stripping refineries and oil and gas producers of tax holiday, saying the move was against the principle of stable fiscal regime and would jeopardise investments in the oil sector.

Chidambaram had in his Budget proposals stripped seven year income tax holidays on commercial production or refining of mineral oil by excluding petroleum and natural gas from the definition of mineral oil.

He proposed that the tax holidays would be available only to refineries commissioning before April 1, 2009, a move that would benefit only Mukesh Ambani-run Reliance Petroleum's [Get Quote] export-oriented Jamnagar refinery, while the ones being set up by public sector firms would be left out.

Sources said the ministry in a letter to the finance ministry stated that the proposal would jeopardise Rs 81,545 crore (Rs 815.45 billion) investment lined up for raising refining capacity by 91 million tons by 2012 to make India a major fuel exporting hub.

It said the time line of April 1, 2009 for withdrawal of fiscal incentive created an imbalance within the sector as only Reliance refinery will be commissioned by then and those of IOC, BPCL [Get Quote] and HPCL [Get Quote] as also Essar would come up thereafter.

Sources said exclusion of petroleum and natural gas from the definition of mineral oil was contrary to the New Exploration Licensing Policy, under which tax holiday has been promised in the contracts for 165 exploration blocks already signed by the government.

The petroleum ministry sought withdrawal of the sunset clause immediately and alternatively applying it to projects that are commissioned after 2012 or for projects announced after April 1, 2009.