Tax sops mulled to boost oil search

Having formalised the bid conditions for the sixth round of the New Exploration and Licensing Policy for oil and gas blocks, the petroleum ministry has mooted tax incentives to give a further fillip to the oil exploration and production (E&P) sector.

As part of its Budget proposals, the oil ministry has asked the finance ministry to grant infrastructure status to the E&P sector, a tax holiday for these companies, exemption from service tax, depletion allowance benefit and rationalisation of sales tax on natural gas.

Infrastructure status had also been sought for LNG import projects and cross-country pipelines, added sources.

The measures, the oil ministry hopes, will enable rapid capital formation and attract investment. Infrastructure status will mean that E&P companies will get a 10-year tax holiday.

In addition, the firms had also asked for the right to choose the seven years of the permissible 15 years as a tax holiday.

At present, the tax holiday is available for initial seven years only when exploration companies have large expenditure to set off, which offsets the tax benefit. E&P companies have pointed out the discrepancies on tax-related issues for the sector.

In response, the petroleum ministry has said the issues will be taken up during Budget 2006-07. It has also demanded that sales tax on natural gas be made uniform at the rate of 4 per cent, as applicable to crude oil. States currently levy sales tax ranging from 8 to 14 per cent on liquefied petroleum gas.

Clarity is also required for allowing companies to set off losses against other revenues of the same company, without waiting for start of commercial production and contract area. Companies had also asked for allowing movement of materials from one contract to another.

They have also suggested that such movement should be allowed with the approval of director-general of hydrocarbons.

The ministry has also mooted nil Customs duty on capital goods imported for new refineries/refinery expansion, green fuel projects and E&P projects.