Natural gas: Hike in MAT an irritant

Earlier, the tax holiday U/s 80-IB(9) of IT Act was available only for profit from commercial production or refining of mineral oil, which now stands extended to natural gas too.

Budget provisions

The following changes in the duties have been proposed in the Union budget 2009-10:

• Minimum Alternate Tax (MAT) to be increased to 15% of book profits from 10%. The period allowed carrying forward the tax credit under MAT to be extended from seven years to ten years.
• Tax holiday under section 80-IB(9) of the Income Tax Act, which was hitherto available in respect of profits arising from the commercial production or refining of mineral oil, to be extended to natural gas. This tax benefit to be available to undertakings in respect of profits derived from the commercial production of mineral oil and natural gas from oil and gas blocks which are awarded under the NELP-VIII round of bidding. The section to be retrospectively amended to provide that "undertaking" for the purposes of section 80-IB(9) will mean all blocks awarded in any single contract.
• 100% deduction would be allowed in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively where the business relates to laying and operating a cross-country natural gas pipeline network for distribution. Further, profit-linked deduction provided under section 80-IA to the business of laying and operating a cross country natural gas distribution network will be discontinued
• Fringe Benefit Tax on the value of certain fringe benefits provided by employers to their employees to be abolished.

Industry expectations - not fulfilled

Natural gas to be in the list of declared goods

Waiver of Customs duty on import of materials viz. pipes; valves; flanges; data communication system for laying of petroleum products and gas pipelines be made NIL

Budget impact

The major announcement of extension of income tax benefits to Natural gas from earlier to commercial production of Mineral oil only. However the benefit is available only to blocks awarded in NELP VIII. This means RIL will not be able to take tax benefit under section 80-IB(9) for KG gas production.

The hike in Minimum Alternate Tax (MAT) from 10% to 15% is an irritant for the corporate sector.  On the positive side, this hike has come with a benefit of extending the period allowed to carry forward the tax credit under MAT from seven years to ten years.

Also, the hike in MAT will not be earnings dilutive but will only be cash flow dilutive.  The increase in liability towards MAT will be matched by an incremental deferred tax credit.

Hence, the net profit or EPS of a company will not change due to hike in MAT from 10% to 15%.  But it will mean increase in cash outflow, and if the company is not returning to profits as per Income tax act within ten years, then it may have to forego them.

So, from a current year(s) point of view, increase in MAT from 10% to 15% is not earnings dilutive but cash flow dilutive. On the other hand, the removal of Fringe Benefit Tax (FBT) is a major positive for Corporate India.

Stocks to watch

Gujarat Gas Company, Indraprastha Gas, Gujarat state Petronet, RIL

Outlook

Budget 2009-10 cleared the confusion on tax benefits with regard to Natural gas under section 80-IB(9). However benefit has come with a rider that block awarded in NELP VIII shall only be able to take benefit.

Also Investment linked tax incentives to be provided to the business of laying and operating cross-country natural gas or crude or petroleum oil pipeline network for distribution on common carrier principle will boost more investment. Under this method, all capital expenditure, other than expenditure on land, goodwill and financial instruments to be fully allowable as deduction. Overall the budget is positive for Natural gas.