It has been a roller coaster ride for the oil and gas sector with the onset of the pandemic in 2020. Crude prices had slumped only to increase substantially in the recent past. Rising crude doesn’t augur well for the Indian economy, being predominantly import-dependent. Thus, the Indian government has emphasized adopting alternate fuels and themes like bio-fuel, green renewables, electric vehicles, which will act as import substitutes.
However, this transition would take substantial time and it is of utmost importance to encourage domestic exploration and production of oil and gas to reduce import dependence as well as achieve energy security. This has been a daunting task and various policy measures such as the introduction of the Open Acreage Licensing Policy and pricing freedom were introduced in recent oil and gas exploration rounds. However, the Industry expects several more reforms to provide a fillip to the sector as a whole, to enable the ‘ease of doing business in India’.
Policy measures
Worldwide, international oil companies are moving away from oil and gas assets to invest in new energies. To attract them, it is important to review current upstream policies to make them more attractive. The government may consider measures to reduce royalties, remove Oil Industries Development cess and create marketing freedom for Pre-NELP blocks. Further, approval processes for oil and gas blocks may be simplified and expedited at various government levels.
The government may also provide clarity on medium-term transport fuels policies given the concurrent push for City Gas Distribution Projects (CNG), Biofuels (Ethanol, Methanol, CBG), LNG (HCV’s, etc) Electronic Vehicles. City Gas Distribution regulations should be relooked and long-standing demand of players to allow sharing of facilities/infrastructure in the adjoining geographical areas may be considered to create efficiency and value. Various schemes for setting up biogas projects may also be evaluated and capital subsidies earlier available for such projects may be considered to create demand and interest for these projects.
Taxation measures
As a part of the ‘Make in India’ campaign, a new concessional tax regime was introduced to provide a lower tax rate of 15 percent (plus applicable surcharge and cess) for newly set up manufacturing companies. To encourage new players, the government may consider including the new oil and gas exploration companies within this regime.
Similarly, foreign companies required to set up project offices in India are taxed at 40 percent (plus applicable surcharge and cess). Such project offices are treated at par with Indian companies in terms of compliances under various regulations, like registration with the Ministry of Corporate Affairs, CSR contribution, etc., however, they are not entitled to the reduced corporate tax rate. The aforesaid concessional tax regime may also be extended to such foreign companies, which will radically improve the return of investment on such projects and may generate interest.
Such a regime may also be extended to City Gas Distribution companies that process the gas in various forms and transport it to customers for varied needs. This will remove ambiguity and reduce taxation on the sector, which is already burdened with taxes. This regime may also be extended for LNG terminals, pipeline companies, and various companies in the value chain. Further, such a regime has a sunset date of 31 March 2023, which may be extended considering the substantial gestation period of the industry.
Considering large capital investments, the government may also consider providing investment-linked deductions. The Minimum Tax Regime may be removed to make the tax regime simpler.
To increase investor confidence, appropriate clarifications can be issued on matters pending before various courts.
On the indirect tax front, petroleum products i.e., crude oil, natural gas, etc. needs inclusion under the GST regime to enable a claim of input credit and reduce overall cost in the value chain. The government may wish to provide their thought process on these aspects in the Budget session.
The above contains only certain issues and there is a need to deep dive and deliberate on various facets and challenges faced by the industry. To encourage more participation in India, the Government should be committed to providing a clear and transparent framework to introduce a combination of beneficial policy, administrative and tax reforms to provide a much-needed impetus to the sector.
Sanjay Grover is Partner, EY India; Ratish Iyer, Senior Manager- Tax & Regulatory Services, EY India also contributed to the article. Views are personal.
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