UPDATE:Tax break for natural gas production comes with rider

Finance Minister Pranab Mukherjee today restored to tax breaks on profits made from production and sale of natural gas, but restricted the benefit only to blocks to be awarded in the forthcoming auction, depriving firms like RIL of the gain.

RIL is producing gas from an area awarded to it under a similar auction 10-years ago.

Mukhejree, however, gave companies like Essar Oil a boost by extending the seven year holiday on payment of income tax to private firms that set up new oil refineries by March 31, 2012. Previously, oil refinery in private sector coming after April 1, 2009 were denied of the benefit.

Presenting the full Budget for 2009-10, he said the tax holiday under section 80-IB(9) of the Income Tax Act would be available for companies on profits they earn from "the commercial production of mineral oil and natural gas from oil and gas blocks which are awarded under the New Exploration Licensing Policy (NELP) 8th round of bidding."

The Memorandum Explaining the Provisions in the Finance Bill for 2009 stated that the tax benefit would be available on natural gas produced from blocks awarded under NELP-VIII, bids for which are yet to come in, and which "begin commercial production of natural gas on or after April 1, 2009."

The Budget document stated that the sun-set for tax holiday for private refiners sector at March 31, 2009 was "extremely short" and so extended it by a further three years to March 31, 2012. "The new terminal date will be the same for both the public and the private sector."

The only silver lining for the gas sector was the announcement by Mukherjee of a blueprint for long distance gas pipeline highways leading to a National Gas Grid.

"This would facilitate transportation of gas across the length and breadth of the country," he said.

Though the Cabinet had guaranteed exemption from payment of income-tax on oil and gas production from areas awarded under the New Exploration Licensing Policy, the Finance Ministry last year said the fiscal incentive are only meant for oil.

This stand, which ran contrary to the Government's written commitment while attracting investment under NELP since 1999, led to a damp squib response to the last auction round and has led to postponement of the current round.

The Finance Ministry believes that the term mineral oil for the purpose of giving tax holidays includes production of only crude oil but it chose to ignore the fact that the same tax incentives under the same act have been promised to producers of gas from below the coal seams (coal bed methane) where no oil can ever occur.

The 8th round of auction of 70 oil and gas exploration blocks, which was launched in April, had been suspended because of concerns of investor backlash in the absence of a 7-year income tax holiday.

RIL began gas production from its prolific Krishna Godavari basin D6 block on April 1 but the the block was awarded to it in the first round of NELP in 1999.