Crude oil producers benefit from 5% customs duty

The domestic crude oil producers will benefit from levy of customs duty at 5% on crude oil, and effective tax incidence will come down due to weighted deduction on R & D as well as cut in the surcharge on corporate taxes for domestic companies.

Budget provisions

The following announcements have been proposed in the Union budget 2010-11:

• Increase in customs duty on crude petroleum from Nil to 5%
• Decision on Kirti Parikh recommendations will be taken in due course
• Weighted deduction on expenditure incurred on in-house R&D enhanced from 150% to 200%. Also weighted deduction on payments made to National Laboratories, research associations, colleges, universities and other institutions, for scientific research increased from 125% to 175%
• Minimum Alternate Tax (MAT) to be increased to 18% of book profits from 15%
• Reduction in surcharge on corporate tax of domestic companies from 10% to 7.5%.
• The rate of service tax of 10% applicable since 24.02.2009 has been continued

Industry expectations - Not fulfilled

• With drawl of service tax paid on critical services consumed by exploration and production companies - Not fulfilled
• Hundred per cent tax holiday for a period of any 10 consecutive years out of 15 years beginning with the year in which the undertaking starts commercial production or refining of mineral oil - Not fulfilled
• Deduction for expenditure incurred on drilling and exploration activities by an Indian company with overseas production block - Not fulfilled
• Exemption of oil and gas profits from minimum alternate tax - Not fulfilled.
• Contrary MAT tax rate has been increased to 18% of book profits from 15%.

Budget impact

None of the expectations of the oil drilling and allied services were full filled in the Union Budget 2010-11. However on the negative side MAT rates were increased from 15% to 18% as these companies normally earn higher book profits in the initial years after commercial production begins, since the tax deductions in respect of exploration and drilling expenditure is granted on an accelerated basis.

On the positive side, there will be marginal reduction in the effective corporate tax due to reduction in surcharge from 10% to 7.5%.  With the landed cost of crude oil increasing due to levy of customs duty at 5%, it will benefit indigenous crude oil producers like ONGC, Cairn India and Reliance Industries.

Stocks to watch

ONGC, RIL, Cairn India

Outlook

The levy of customs duty on crude oil at 5% can boost the effective realisations of crude oil for ONGC and Cairn India.  But this benefit will accrue at a higher rate to Reliance Industries, as it will get the benefit of hike in customs duty on petroleum productions.

No other major industry specific announcement was made in the Union budget 2010-11 besides increasing MAT rates were increased from 15% to 18% and reduction in surcharge on corporate tax for domestic companies. The Union Budget 2010-11 was positive for the Crude oil producers.