Doubt cleared over mineral oil definition

The government has removed the ambiguity over the definition of mineral oil in the draft Direct Taxes Code released today by stating that “the business of mineral oil or natural gas means any business consisting of the prospecting for or extraction of mineral oil or natural gas”. The clarity would help companies take an informed investment decision.

In the 2008-09 Budget, the government had stated that production of natural gas was different from oil and as such the seven-year tax holiday available to oil production should not be applicable for natural gas. Finance Minister Pranab Mukherjee though in his Budget for 2009-10 said that seven years’ holiday from payment of income tax on profits earned from production and sale of natural gas would be available for blocks to be awarded in the eight round of New Exploration Licensing Policy, or Nelp-VIII.

It did not, however, clear the air on whether the definition of mineral oil included natural gas or not, besides leaving the existing contracts without the tax holiday.

In April this year, when the government launched the Nelp-VIII, investors expressed concern over the lack of clarity. The road show for the eighth round was deferred over ambiguity on the availability of tax holidays for natural gas.

The tax code, which would be discussed before being placed before Parliament for approval, has a separate schedule on the income determination regime for the “business of mineral oil or natural gas”. The definition has been spelt out in the schedule.