In a blow to oil and gas hunt in the country, Finance Minister Pranab Mukherjee today took away tax breaks on oil produced from areas that will be awarded in the ongoing licencing round.
Exemption from payment of Income Tax on earnings from production of mineral oil for 7-years will be available only to blocks that are awarded by March 31 this year, according to the Budget documents.
Bidding for exploration blocks on offer in the ninth round of New Exploration Licensing Policy (NELP) closes on March 18 and award of blocks is targeted for second half of 2011 calendar year.
Akhil Sambhar of Ernst & Young said the Budget proposes to remove tax holiday for NELP blocks awarded after 31 March 2011. "Unless this date is extended, blocks awarded under ongoing NELP-IX round will not be eligible for tax holiday as it is unlikely that Production Sharing Contracts (PSC) for these blocks will be signed prior to March 31, 2011."
But Mukherjee has gone beyond and streamlined the definition of eligibility for the tax break.
"For the purposes of claiming this deduction, all blocks licenced under a single contract, which has been awarded under the NELP announced by the government vide resolution dated February 10, 1999, are treated as a single "undertaking," the Budget said.
This essentially means that in a block or area, the seven year tax holiday will begin with the first drop of oil being produced. The tax break will end in exactly seven years from that date.
The industry had been arguing that each oil producing well in the block be treated as an "undertaking" for the purpose of tax break instead of the whole area being classified as one unit.
A block typically has multiple fields and several wells, each of these fields and well are put into production in different time spans --- say wells in Field A in a particular block are put on production in April 2011 while wells in Field B (also in the same block) may be put on production in 2014.
The industry wanted tax breaks be available for revenue earned from wells in Field A for seven years beginning April 2011 and the same incentive should be available for earnings from wells in Field B from 2014.
But the Budget for 2011-12 has done away with this distinction saying the block will be treated as one unit or "undertaking" and tax break will be available only on first seven years of oil production irrespective of oilfields.