Oil and Gas

Overview 2010

ENERGY AND NATURAL RESOURCES

kpmg.com/in

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Head - Markets

T: +91 22 3090 2320

E: vutamsingh@kpmg.com

Head - Energy and Natural Resources

T: +91 22 3090 1740

E: arvindmahajan@kpmg.com

Vikram Utamsingh

Arvind Mahajan

www.kpmg.com/in

The oil and gas sector in India has been instrumental in fuelling the growth of the Indian

economy, hence presenting a significant opportunity for investors in the years to come. The

government has also been doing its bit in recent times to to deregulate the industry and

encourage greater foreign participation.

The New Exploration Licensing Policy (NELP), conceived to address the increasing demand

supply gap of energy in India, has proved to be successful in attracting the interest of both

domestic private sector players and some foreign players with eight rounds of bidding, with

Reliance Industries and Cairn being particularly active in this arena .

Other segments such as Refining, LNG, City Gas Distribution etc. are also seeing some

action.

India is now surplus in refining capacity and aims to establish itself as a refining hub due to

various geographical aspects in its favour as well. New refineries may eventually be built by

domestic companies and in partnerships as well, with Reliance Industries doubling the size

of its already dominant refinery in order to meet future products demand.

Moreover, the government is planning its first ever offer of shale gas exploration in 2011, a

potential game-changer with regard to the price economics of the oil and gas sector.

This document intends to provide the reader with a concise overview of the various

segments comprising the oil and gas sector in India and a basic understanding of the

players, size, major developments and dynamics of the sector across the value chain.

We have attempted to summarize all these aspects in the document giving facts and our

views and analysis regarding this space.

Keeping with this, the following chapters apprise us about the Energy Market, the Upstream

sector, Coal Bed Methane, Refining, Gas Transmission and Distribution, LNG, Shale Gas,

Retailing of Fuels and the Taxation Regime specific to the Indian oil and gas sector

I hope you find this report insightful and helpful in your study of the Indian Oil and Gas

sector

1

FOREWORD

1 KPMG Analysis

Arvind Mahajan

Executive Director and

Head of Energy and Natural

Resources Sector

KPMG in India

The oil and gas sector in India has been instrumental in fuelling the growth of the Indian

economy, hence presenting a significant opportunity for investors in the years to come. The

government has also been doing its bit in recent times to to deregulate the industry and

encourage greater foreign participation.

The New Exploration Licensing Policy (NELP), conceived to address the increasing demand

supply gap of energy in India, has proved to be successful in attracting the interest of both

domestic private sector players and some foreign players with eight rounds of bidding, with

Reliance Industries and Cairn being particularly active in this arena .

Other segments such as Refining, LNG, City Gas Distribution etc. are also seeing some

action.

India is now surplus in refining capacity and aims to establish itself as a refining hub due to

various geographical aspects in its favour as well. New refineries may eventually be built by

domestic companies and in partnerships as well, with Reliance Industries doubling the size

of its already dominant refinery in order to meet future products demand.

Moreover, the government is planning its first ever offer of shale gas exploration in 2011, a

potential game-changer with regard to the price economics of the oil and gas sector.

This document intends to provide the reader with a concise overview of the various

segments comprising the oil and gas sector in India and a basic understanding of the

players, size, major developments and dynamics of the sector across the value chain.

We have attempted to summarize all these aspects in the document giving facts and our

views and analysis regarding this space.

Keeping with this, the following chapters apprise us about the Energy Market, the Upstream

sector, Coal Bed Methane, Refining, Gas Transmission and Distribution, LNG, Shale Gas,

Retailing of Fuels and the Taxation Regime specific to the Indian oil and gas sector

I hope you find this report insightful and helpful in your study of the Indian Oil and Gas

sector

1

FOREWORD

1 KPMG Analysis

Arvind Mahajan

Executive Director and

Head of Energy and Natural

Resources Sector

KPMG in India

Overview of the Indian economy

The Indian oil and gas market

India’s upstream sector

Refining in India

Gas transmission and distribution

Coal bed methane

Liquefied natural gas

Shale gas

Fuel retailing in India

Overview of the Indian taxation regime

Regulatory and tax regime for

upstream sector

01

02

03

05

06

08

09

10

11

12

15

TABLE OF CONTENTSACRONYMS USED

E&P Exploration & Production

CBM Coal Bed Methane

DGH Directorate General of Hydrocarbons

MT Metric Tonne

MMT Million Metric Tonnes

MMSCMD Million Standard Cubic Metres Per Day

MoPNG Ministry of Petroleum and Natural Gas

NELP New Exploration Licensing Policy

NG Natural Gas

PNGRB Petroleum and Natural Gas Regulatory Board

Overview of the Indian economy

The Indian oil and gas market

India’s upstream sector

Refining in India

Gas transmission and distribution

Coal bed methane

Liquefied natural gas

Shale gas

Fuel retailing in India

Overview of the Indian taxation regime

Regulatory and tax regime for

upstream sector

01

02

03

05

06

08

09

10

11

12

15

TABLE OF CONTENTSACRONYMS USED

E&P Exploration & Production

CBM Coal Bed Methane

DGH Directorate General of Hydrocarbons

MT Metric Tonne

MMT Million Metric Tonnes

MMSCMD Million Standard Cubic Metres Per Day

MoPNG Ministry of Petroleum and Natural Gas

NELP New Exploration Licensing Policy

NG Natural Gas

PNGRB Petroleum and Natural Gas Regulatory Board

OVERVIEW OF THE INDIAN ECONOMY THE INDIAN OIL AND GAS MARKET

India booming

India is gaining strategic importance globally

owing to the impressive economic growth

pattern and market attractiveness. After

coming out successfully from the financial

crisis, economy is set to demonstrate robust

growth again with the GDP growth rate of

around 9.7 percent for 2010-11 . With a GDP

of USD 1.36 trillion , India is currently the

world's fourth largest economy in

Purchasing Power Parity (PPP).

1

2

India is the world’s fifth-biggest energy The oil and gas sector is dominated by state-

consumer and continues to grow rapidly. It controlled enterprises with ONGC the

is the third-biggest global coal producer, but largest upstream-oriented oil company,

has limited its supplies of oil. Oil accounts dominating the exploration and production

for about 31 percent of India’s total energy (E&P) segment and accounting for roughly

consumption, with its share of the mix around three-quarters of the country’s oil

having fallen from 35 percent earlier this output. India’s downstream segment is also

decade. India’s 5.80bn bbl of proven oil dominated by state-controlled entities,

reserves (BP Statistical Review of World although private companies have increased

Energy, June 2009) represents just 0.5 their market share. Indian Oil Corporation

percent of the world’s total, with Mumbai (IOC) is the largest state-controlled

High being the biggest producing field. downstream company, operating 10 of

India’s average oil production (total liquids) in India’s 17 refineries and controlling about

2008 was 766,000b/d. three-quarters of the domestic oil

transportation network . In terms of gas, India currently accounts for

0.4 percent of global reserves and just over

1 percent of production . While most of the

developed gas is in Mumbai High, major

discoveries by a number of domestic

companies hold significant medium-to long-

term potential, with Reliance Industries,

state-controlled Oil & Natural Gas

Corporation (ONGC) and Gujarat State

Petroleum Corporation (GSPC) all

confirming significant deepwater finds that

are now under development or in early-stage

production.

1

1

1

Supported by high rate of domestic saving

and capital formation…

Growth in savings has also supported the

surge in capital formation, which is

indicated by a steady increase in the rate of India’s growth has been financed by a

Gross Domestic Rate of Capital Formation steady rise in corporate and household

(GDCF) from 32.73 percent in 2004-05 to savings. Domestic savings have been the

34.93 percent in 2008-09.dominant source of national savings, where

the rate of Gross Domestic Savings

touches 32.53 percent (2008-09), one of

the highest among emerging economies.

Source: NCAER, IMF

Source: BP statistical review of world energy 2010

2005-06

2.0

4.0

6.0

8.0

10.0

9.5 9.7 9.0

6.77.4

9.7

2006-07 2007-08 2008-09 2009-10 2010-2011E

India GDP Growth Rates

1 BMI India Oil and Gas Report Q4 2010

Indian Energy basket - 2009

Oil32%

Coal52%

Gas10%

Hydro5% Nuclear

1%

Estimated Indian Energy basket - 2025

Oil25%

Coal51%

Gas20%

Hydro2% Nuclear

2%

01 02

1 International Monetary Fund, World Economic Outlook,April 2010

2 Reserve bank of India, April 2010

OVERVIEW OF THE INDIAN ECONOMY THE INDIAN OIL AND GAS MARKET

India booming

India is gaining strategic importance globally

owing to the impressive economic growth

pattern and market attractiveness. After

coming out successfully from the financial

crisis, economy is set to demonstrate robust

growth again with the GDP growth rate of

around 9.7 percent for 2010-11 . With a GDP

of USD 1.36 trillion , India is currently the

world's fourth largest economy in

Purchasing Power Parity (PPP).

1

2

India is the world’s fifth-biggest energy The oil and gas sector is dominated by state-

consumer and continues to grow rapidly. It controlled enterprises with ONGC the

is the third-biggest global coal producer, but largest upstream-oriented oil company,

has limited its supplies of oil. Oil accounts dominating the exploration and production

for about 31 percent of India’s total energy (E&P) segment and accounting for roughly

consumption, with its share of the mix around three-quarters of the country’s oil

having fallen from 35 percent earlier this output. India’s downstream segment is also

decade. India’s 5.80bn bbl of proven oil dominated by state-controlled entities,

reserves (BP Statistical Review of World although private companies have increased

Energy, June 2009) represents just 0.5 their market share. Indian Oil Corporation

percent of the world’s total, with Mumbai (IOC) is the largest state-controlled

High being the biggest producing field. downstream company, operating 10 of

India’s average oil production (total liquids) in India’s 17 refineries and controlling about

2008 was 766,000b/d. three-quarters of the domestic oil

transportation network . In terms of gas, India currently accounts for

0.4 percent of global reserves and just over

1 percent of production . While most of the

developed gas is in Mumbai High, major

discoveries by a number of domestic

companies hold significant medium-to long-

term potential, with Reliance Industries,

state-controlled Oil & Natural Gas

Corporation (ONGC) and Gujarat State

Petroleum Corporation (GSPC) all

confirming significant deepwater finds that

are now under development or in early-stage

production.

1

1

1

Supported by high rate of domestic saving

and capital formation…

Growth in savings has also supported the

surge in capital formation, which is

indicated by a steady increase in the rate of India’s growth has been financed by a

Gross Domestic Rate of Capital Formation steady rise in corporate and household

(GDCF) from 32.73 percent in 2004-05 to savings. Domestic savings have been the

34.93 percent in 2008-09.dominant source of national savings, where

the rate of Gross Domestic Savings

touches 32.53 percent (2008-09), one of

the highest among emerging economies.

Source: NCAER, IMF

Source: BP statistical review of world energy 2010

2005-06

2.0

4.0

6.0

8.0

10.0

9.5 9.7 9.0

6.77.4

9.7

2006-07 2007-08 2008-09 2009-10 2010-2011E

India GDP Growth Rates

1 BMI India Oil and Gas Report Q4 2010

Indian Energy basket - 2009

Oil32%

Coal52%

Gas10%

Hydro5% Nuclear

1%

Estimated Indian Energy basket - 2025

Oil25%

Coal51%

Gas20%

Hydro2% Nuclear

2%

01 02

1 International Monetary Fund, World Economic Outlook,April 2010

2 Reserve bank of India, April 2010

Although the story of the Oil & Gas government introduced the NELP in 1997- The weightage to the above three

industry can be traced all the way back to 98, with an aim of encouraging private parameters has varied from one round to

October 1889 when oil was first explored sector investment in the oil and gas sector the other over the eight rounds of NELP.

in Digboi, Assam, India still has vast and providing a level playing field to the As on 30 June 2010, the total investment

unexplored/poorly explored territories. public and private sector through allocating made by Indian and foreign companies was

Exploration activity, prior to The New acreages on the basis of competitive around USD13.8 billion. After concluding

Exploration Licensing Policy (NELP), was bidding as opposed to a nomination basis eight rounds of NELP, 239 production-

dominated by public sector firms such as of earlier. Companies are expected to bid sharing contracts (PSCs) have been

Oil and Natural Gas Corporation Ltd. on the following parameters:signed . The eighth round of the NELP was

(ONGC) and Oil India Ltd. (OIL). The sector • The Work Programme committed to be launched in April 2009 offering 70 blocks,

received a major boost in 1974, when the undertaken the highest number of exploration blocks

massive Mumbai High fields were ever. A total of 62 companies comprising

• Percentage of value of annual discovered off India's west coast. Even 10 foreign and 52 Indian companies have

production sought to be allocated after three decades, these fields continue made bids and 31 PSCs were signed with

towards cost recoveryto be the mainstay of India's indigenous 20 companies in the NELP VIII.

production . • Profit petroleum share offered to the

government at various levels of Realising that these fields would gradually

Investment multiples .deplete over time and no major discoveries

were being brought into production, the

2

1

NELP IX

As a result, Indian service providers will be NELP IX was announced in October 2010 scaling up their activities and capabilities, with various road shows being planned in enhancing their fleet size and widen their major Indian and international cities by the portfolio by offering different specialised government to attract private investment. services and developing their manpower.

Also, with an increased exploration activity Some of the local players might also aim to in India post NELP, we are likely to witness offer their services to other E&P (Exploration increased demand for oil and gas allied & Production) firms across the world e.g. services in India, particularly given the focus Aban Lloyd. On the other hand, MNC on deepwater blocks and frontier basins. players such as Baker Hughes, BJ Services,

Schlumberger, Aker Kvaerner, etc. are likely

to find that the market for their services in

India continues to grow.

Outlook for E&P activity in India

Given the commencement of production On the other hand, the promise offered by

from RIL's KG Basin fields, the certain acreages, particularly off India's east

commencement of Cairn India's production coast, means that the prospects for the

and the potential development of the growth of the upstream sector remains

discoveries announced by GSPC and ONGC, bright with an expected positive spin-off

the E&P sector is poised to see effect on the provision of off-shore services.

considerable activity in the near future. This The government has also shown positive

could mean an increased interest in intent in terms of monetising

exploring India's hydrocarbon potential by unconventional resources like shale gas and

foreign players. However, the recent could be prepared to organise bid rounds as

economic downturn as well as the perceived early as mid next year.

government intervention on freedom to

market gas could serve as a dampener.

INDIA’S UPSTREAM SECTOR

Snapshot of previous rounds of NELP

NELP-I NELP-II NELP-III NELP-IV NELP-V NELP-VI NELP-VII NELP-VIII

No. of blocks offered 48 25 27 24 20 55 57 70

No. of blocks bid for 28 23 24 21 20 52 45 36

No. of bids received 45 44 52 44 69 185 181 76

No. of Blocks awarded 25 23 23 21 20 52 44 31

1 NELP VIII website

2 Notice Inviting Offers for NELP VIII, from NELP-VIII website

03 04

Although the story of the Oil & Gas government introduced the NELP in 1997- The weightage to the above three

industry can be traced all the way back to 98, with an aim of encouraging private parameters has varied from one round to

October 1889 when oil was first explored sector investment in the oil and gas sector the other over the eight rounds of NELP.

in Digboi, Assam, India still has vast and providing a level playing field to the As on 30 June 2010, the total investment

unexplored/poorly explored territories. public and private sector through allocating made by Indian and foreign companies was

Exploration activity, prior to The New acreages on the basis of competitive around USD13.8 billion. After concluding

Exploration Licensing Policy (NELP), was bidding as opposed to a nomination basis eight rounds of NELP, 239 production-

dominated by public sector firms such as of earlier. Companies are expected to bid sharing contracts (PSCs) have been

Oil and Natural Gas Corporation Ltd. on the following parameters:signed . The eighth round of the NELP was

(ONGC) and Oil India Ltd. (OIL). The sector • The Work Programme committed to be launched in April 2009 offering 70 blocks,

received a major boost in 1974, when the undertaken the highest number of exploration blocks

massive Mumbai High fields were ever. A total of 62 companies comprising

• Percentage of value of annual discovered off India's west coast. Even 10 foreign and 52 Indian companies have

production sought to be allocated after three decades, these fields continue made bids and 31 PSCs were signed with

towards cost recoveryto be the mainstay of India's indigenous 20 companies in the NELP VIII.

production . • Profit petroleum share offered to the

government at various levels of Realising that these fields would gradually

Investment multiples .deplete over time and no major discoveries

were being brought into production, the

2

1

NELP IX

As a result, Indian service providers will be NELP IX was announced in October 2010 scaling up their activities and capabilities, with various road shows being planned in enhancing their fleet size and widen their major Indian and international cities by the portfolio by offering different specialised government to attract private investment. services and developing their manpower.

Also, with an increased exploration activity Some of the local players might also aim to in India post NELP, we are likely to witness offer their services to other E&P (Exploration increased demand for oil and gas allied & Production) firms across the world e.g. services in India, particularly given the focus Aban Lloyd. On the other hand, MNC on deepwater blocks and frontier basins. players such as Baker Hughes, BJ Services,

Schlumberger, Aker Kvaerner, etc. are likely

to find that the market for their services in

India continues to grow.

Outlook for E&P activity in India

Given the commencement of production On the other hand, the promise offered by

from RIL's KG Basin fields, the certain acreages, particularly off India's east

commencement of Cairn India's production coast, means that the prospects for the

and the potential development of the growth of the upstream sector remains

discoveries announced by GSPC and ONGC, bright with an expected positive spin-off

the E&P sector is poised to see effect on the provision of off-shore services.

considerable activity in the near future. This The government has also shown positive

could mean an increased interest in intent in terms of monetising

exploring India's hydrocarbon potential by unconventional resources like shale gas and

foreign players. However, the recent could be prepared to organise bid rounds as

economic downturn as well as the perceived early as mid next year.

government intervention on freedom to

market gas could serve as a dampener.

INDIA’S UPSTREAM SECTOR

Snapshot of previous rounds of NELP

NELP-I NELP-II NELP-III NELP-IV NELP-V NELP-VI NELP-VII NELP-VIII

No. of blocks offered 48 25 27 24 20 55 57 70

No. of blocks bid for 28 23 24 21 20 52 45 36

No. of bids received 45 44 52 44 69 185 181 76

No. of Blocks awarded 25 23 23 21 20 52 44 31

1 NELP VIII website

2 Notice Inviting Offers for NELP VIII, from NELP-VIII website

03 04

India, with its current capacity of around the small refineries in the North-east,

180 million tones per annum (mtpa) is which are land-locked and possess a sub-

poised to emerge as a major refining hub, optimal economic size. Similarly major

with considerable capacity additions being technology upgrades are necessary to be

planned over the next few years . Of a total able to produce output from relatively

of 20 refineries in India, public sector units lower grade crude which reduces sourcing

have a capacity of 107.5 MMTPA while the costs thus increasing margins as well as

private sector players comprising of RIL meet new fuel specification standards.

and Essar have a capacity of close to 72 Capacity additions as well as Greenfield

MMTPA. refineries announced by public and private

sector players indicate that almost 40-50

MMTPA of additional refining capacity will

be added by 2013-14 bringing the total

available capacity to nearly 240 MMTPA. In The country has further large expansions the medium term this surplus supply planned and is aiming to emerge as a indicates that there may be reservations refining hub even as global refining markets against making more investments in the have tightened with the closure of small refinery space till the time domestic refineries in North America and Europe demand catches up.mainly due to challenges in investing in

cleaner fuels and high compliance costs. In

addition, permits for Greenfield refineries

are hard to obtain in these countries due to

the environmental concerns. Therefore,

capacity addition is primarily coming from

emerging economies like India, China and

some Middle Eastern countries .

Many of the private sector refineries are

focusing on the export market. As far as

the PSU refineries are concerned, concerns

have been expressed over the viability of

1

Status of the sector

Outlook for refining sector

Regardless of above, some players are

mulling over setting up inland refineries

close to demand centers thus reducing the

cost of distribution (e.g. BPCL plans to set

up a 12 mtpa refinery in Allahabad). This may

result in substituting products of other

refineries and hence creating pressure on

the coastal refineries to look at exports.

REFINING IN INDIA

The transmission and distribution segment to construct four new cross country

of the natural gas sector remains relatively pipelines . Gujarat State Petronet Ltd. The IPI Gas Pipeline Project has been

under-developed, but this is likely to change (GSPL), a GSPC Group company involved in conceived as a tripartite arrangement

in the medium term. gas transmission arm also has an extensive between Iran, Pakistan and India, with the

network of around 2400 Km in Gujarat,and volumes being divided between the two

recently, PNGRB has completed the importing countries of India and Pakistan.

bidding process for three new pipelines The pipeline is estimated to cost around

too.USD 7.5 billion and is expected to be 2300 The gas transmission domain in India has

The existing pipeline capacity of ~220 Km in length .been dominated by the GAIL India Limited. mmscmd is expected to increase to ~ 660 It operates the Hazira – Vijaipur – Although some progress was made, mmscmd in the medium term . This Jagdishpur (HVJ) , Dadri Vijaipur Pipeline several outstanding issues remained. expansion in infrastructure would lead to (total 3452 Km long), and a few other Issues around safe delivery of gas through better gas availability, better tapping of pipelines, connecting the LNG terminal at Pakistan and price of gas lead to the talks demand and thus in turn increase the Dahej to Vijaipur and Uran and the power being suspended in 2008. In April 2010 natural gas demand.plant at Dabhol to Panvel . some progress was made when India

proposed to discuss the pipeline with Iran .With the recent domestic gas finds in the

KG basin off the East coast of India the

transmission of gas to the demand centres

based in the west and north of the country

has assumed greater importance. Reliance

Gas Transportation Infrastructure Limited The Asian Development Bank (ADB)-backed

(RGTIL) has implemented the 1385 Km 1,680-km long pipeline is likely to connect

East West Gas Pipeline to carry 80 the gas fields in Turkmenistan to India. The

mnscmd (million standard cubic metres per pipeline traverses through Afghanistan and

day ) of natural gas from Kakinada in Pakistan (including 145 km in Turkmenistan,

Andhra Pradesh to Bharuch in Gujarat and 735 km in Afghanistan and 800 km in

traverses through the states of Karnataka Pakistan upto the India border). It would

and Maharashtra and it has further planned supply 38 mmscmd of gas to India.

Gas transmission

Transnational pipelines

1

3

2

1

4

Iran-Pakistan-India pipeline

Turkmenistan-Afghanistan-Pakistan-India

(TAPI) pipeline

GAS TRANSMISSION AND DISTRIBUTION

1 RGTIL website, September 2010

2 PNGRB

3 Wikipedia, September 2010 (Iran-Pakistan-India Pipeline)

4 Times of India, July 2010 (IPI Pipeline: India to resume talks with Iran)

1 MoPNG

2005 2006 2007 2008 2009 2010 2011 2012 2013

MM

TPA

300

250

200

150

100

50

Capacity

127

241

05 06

India, with its current capacity of around the small refineries in the North-east,

180 million tones per annum (mtpa) is which are land-locked and possess a sub-

poised to emerge as a major refining hub, optimal economic size. Similarly major

with considerable capacity additions being technology upgrades are necessary to be

planned over the next few years . Of a total able to produce output from relatively

of 20 refineries in India, public sector units lower grade crude which reduces sourcing

have a capacity of 107.5 MMTPA while the costs thus increasing margins as well as

private sector players comprising of RIL meet new fuel specification standards.

and Essar have a capacity of close to 72 Capacity additions as well as Greenfield

MMTPA. refineries announced by public and private

sector players indicate that almost 40-50

MMTPA of additional refining capacity will

be added by 2013-14 bringing the total

available capacity to nearly 240 MMTPA. In The country has further large expansions the medium term this surplus supply planned and is aiming to emerge as a indicates that there may be reservations refining hub even as global refining markets against making more investments in the have tightened with the closure of small refinery space till the time domestic refineries in North America and Europe demand catches up.mainly due to challenges in investing in

cleaner fuels and high compliance costs. In

addition, permits for Greenfield refineries

are hard to obtain in these countries due to

the environmental concerns. Therefore,

capacity addition is primarily coming from

emerging economies like India, China and

some Middle Eastern countries .

Many of the private sector refineries are

focusing on the export market. As far as

the PSU refineries are concerned, concerns

have been expressed over the viability of

1

Status of the sector

Outlook for refining sector

Regardless of above, some players are

mulling over setting up inland refineries

close to demand centers thus reducing the

cost of distribution (e.g. BPCL plans to set

up a 12 mtpa refinery in Allahabad). This may

result in substituting products of other

refineries and hence creating pressure on

the coastal refineries to look at exports.

REFINING IN INDIA

The transmission and distribution segment to construct four new cross country

of the natural gas sector remains relatively pipelines . Gujarat State Petronet Ltd. The IPI Gas Pipeline Project has been

under-developed, but this is likely to change (GSPL), a GSPC Group company involved in conceived as a tripartite arrangement

in the medium term. gas transmission arm also has an extensive between Iran, Pakistan and India, with the

network of around 2400 Km in Gujarat,and volumes being divided between the two

recently, PNGRB has completed the importing countries of India and Pakistan.

bidding process for three new pipelines The pipeline is estimated to cost around

too.USD 7.5 billion and is expected to be 2300 The gas transmission domain in India has

The existing pipeline capacity of ~220 Km in length .been dominated by the GAIL India Limited. mmscmd is expected to increase to ~ 660 It operates the Hazira – Vijaipur – Although some progress was made, mmscmd in the medium term . This Jagdishpur (HVJ) , Dadri Vijaipur Pipeline several outstanding issues remained. expansion in infrastructure would lead to (total 3452 Km long), and a few other Issues around safe delivery of gas through better gas availability, better tapping of pipelines, connecting the LNG terminal at Pakistan and price of gas lead to the talks demand and thus in turn increase the Dahej to Vijaipur and Uran and the power being suspended in 2008. In April 2010 natural gas demand.plant at Dabhol to Panvel . some progress was made when India

proposed to discuss the pipeline with Iran .With the recent domestic gas finds in the

KG basin off the East coast of India the

transmission of gas to the demand centres

based in the west and north of the country

has assumed greater importance. Reliance

Gas Transportation Infrastructure Limited The Asian Development Bank (ADB)-backed

(RGTIL) has implemented the 1385 Km 1,680-km long pipeline is likely to connect

East West Gas Pipeline to carry 80 the gas fields in Turkmenistan to India. The

mnscmd (million standard cubic metres per pipeline traverses through Afghanistan and

day ) of natural gas from Kakinada in Pakistan (including 145 km in Turkmenistan,

Andhra Pradesh to Bharuch in Gujarat and 735 km in Afghanistan and 800 km in

traverses through the states of Karnataka Pakistan upto the India border). It would

and Maharashtra and it has further planned supply 38 mmscmd of gas to India.

Gas transmission

Transnational pipelines

1

3

2

1

4

Iran-Pakistan-India pipeline

Turkmenistan-Afghanistan-Pakistan-India

(TAPI) pipeline

GAS TRANSMISSION AND DISTRIBUTION

1 RGTIL website, September 2010

2 PNGRB

3 Wikipedia, September 2010 (Iran-Pakistan-India Pipeline)

4 Times of India, July 2010 (IPI Pipeline: India to resume talks with Iran)

1 MoPNG

2005 2006 2007 2008 2009 2010 2011 2012 2013

MM

TPA

300

250

200

150

100

50

Capacity

127

241

05 06

Myanmar-Bangladesh-India pipeline PNGRB has already completed two rounds

of bidding for awarding licenses for city gas A 1,575 km long pipeline connecting the

distribution for various cities. These Shwe field in the A-1 block in Myanmar, in

The main driver for the development of gas licenses are awarded through an open which both ONGC Videsh and GAIL own a

transmission and CGD shall be the competitive bidding process, with there stake, was considered to bring gas to India,

availability of requisite volumes of gas. being a level playing field for both domestic while passing through Bangladesh. In

With the development of RIL's KG Basin and foreign entities. PNGRB has also called February 2010 Bangladesh lifted its

and other fields, the opportunity could be for the third and the fourth round of bids for opposition to a gas pipeline linking India

available; what now matters is whether the the states of Gujarat, Punjab, Haryana and and Myanmar and running through its

CGD license-holders can obtain gas West Bengal (Round 3) and Kerala, Andhra territory, paving the way for the

supplies and develop gas distribution Pradesh, Maharashtra , Madhya Pradesh establishment of a regional gas grid .

infrastructure.and Uttar Pradesh (Round 4).

The CGD space is seeing bidding from not

only the firms already in the gas

transportation and distribution business but The City Gas Distribution (CGD) space in also other firms which would like to India has been steadily increasing with diversify into this sector. EPC contractors, many cities being added into the fold after engineering consultants, foreign gas New Delhi, Mumbai and others in Gujarat. majors, manufacturing firms, infrastructure The notification of Section 16 of the players and others have shown interest in PNGRB Act in March 2010 allowing PNGRB this sector. to grant licenses for CGD is likely to

In addition to the above, stricter quicken the pace of rollout of CGD services environmental norms around urban centres in cities and geographical areas. The and increasing urbanisation is likely to government is also playing its part. It has increase the demand for piped natural gas allocated 3.39 mmscmd of gas on firm and as a clean and efficient fuel. Going forward fall back basis from RIL’s D-6 block in the more cities are likely to have access to KG Basin . local gas distribution networks.

5

6

Outlook for transformation and

distribution

City gas distribution

COAL BED METHANE

In order to exploit India's vast coal reserves

and the methane gas trapped in coal seams,

the government formulated a Policy for Coal

Bed Methane (CBM) in 1997. The MoPNG

(Ministry of Petroleum and Natural Gas) was

to be the administrative ministry with the

DGH (Directorate General of Hydrocarbons)

as the implementing agency and

accordingly, a MoU was signed between the

MoPNG and Ministry of Coal in September

1997. The first round of CBM was held in

2001, on the lines of NELP, with competitive

bidding deciding the award of acreages. So

far four rounds of bidding have been

completed and 33 blocks have been

awarded.

The potential of CBM as a primary energy

resource in India is being established and

increasingly efforts are being made to

commercialise the same. The proven CBM

reserves in India are equivalent to the Oil

and Natural gas reserves in India . At USD

4.2/mmbtu it translates to a USD 130 billion

opportunity.

1

Major Terms and conditions offered to the

bidders for Round four

• Fiscal stability provision in the contract

• No govt. participating interest

• No up-front payment

• No signature bonus required

• No customs duty on imports

• Freedom to sell gas domestically at

market-determined rates.

This sector has attracted public sector

enterprises – ONGC and GAIL, domestic

private sector companies – Great Eastern

Energy Corporation (GEECL), Reliance

Energy Ltd, Reliance Natural Resources Ltd,

Essar and foreign players – Arrow Energy,

BP Exploration, GeoPetrol etc . Some of the

companies have also entered into

commercial long term Gas Sale Agreement.

The policy regime is also favourable to

exploration and commercialisation of the

CBM opportunity in India.

2

5 Livemint.com, February 2010 (‘Bangladesh agrees to tri-nation gas pipeline’)

6 Infraline and Secondary Research

1 Integrated Energy Policy, Report of Expert Committee, Planning Commission, August, 2006 pipeline’)

2 KPMG Research

Btoe

Coal

2.0

4.0

6.0

8.0

10.0

12.0

14.0

13.49

1.220.79

1.100.77

Lignite Oil Gas CBM

07 08

Myanmar-Bangladesh-India pipeline PNGRB has already completed two rounds

of bidding for awarding licenses for city gas A 1,575 km long pipeline connecting the

distribution for various cities. These Shwe field in the A-1 block in Myanmar, in

The main driver for the development of gas licenses are awarded through an open which both ONGC Videsh and GAIL own a

transmission and CGD shall be the competitive bidding process, with there stake, was considered to bring gas to India,

availability of requisite volumes of gas. being a level playing field for both domestic while passing through Bangladesh. In

With the development of RIL's KG Basin and foreign entities. PNGRB has also called February 2010 Bangladesh lifted its

and other fields, the opportunity could be for the third and the fourth round of bids for opposition to a gas pipeline linking India

available; what now matters is whether the the states of Gujarat, Punjab, Haryana and and Myanmar and running through its

CGD license-holders can obtain gas West Bengal (Round 3) and Kerala, Andhra territory, paving the way for the

supplies and develop gas distribution Pradesh, Maharashtra , Madhya Pradesh establishment of a regional gas grid .

infrastructure.and Uttar Pradesh (Round 4).

The CGD space is seeing bidding from not

only the firms already in the gas

transportation and distribution business but The City Gas Distribution (CGD) space in also other firms which would like to India has been steadily increasing with diversify into this sector. EPC contractors, many cities being added into the fold after engineering consultants, foreign gas New Delhi, Mumbai and others in Gujarat. majors, manufacturing firms, infrastructure The notification of Section 16 of the players and others have shown interest in PNGRB Act in March 2010 allowing PNGRB this sector. to grant licenses for CGD is likely to

In addition to the above, stricter quicken the pace of rollout of CGD services environmental norms around urban centres in cities and geographical areas. The and increasing urbanisation is likely to government is also playing its part. It has increase the demand for piped natural gas allocated 3.39 mmscmd of gas on firm and as a clean and efficient fuel. Going forward fall back basis from RIL’s D-6 block in the more cities are likely to have access to KG Basin . local gas distribution networks.

5

6

Outlook for transformation and

distribution

City gas distribution

COAL BED METHANE

In order to exploit India's vast coal reserves

and the methane gas trapped in coal seams,

the government formulated a Policy for Coal

Bed Methane (CBM) in 1997. The MoPNG

(Ministry of Petroleum and Natural Gas) was

to be the administrative ministry with the

DGH (Directorate General of Hydrocarbons)

as the implementing agency and

accordingly, a MoU was signed between the

MoPNG and Ministry of Coal in September

1997. The first round of CBM was held in

2001, on the lines of NELP, with competitive

bidding deciding the award of acreages. So

far four rounds of bidding have been

completed and 33 blocks have been

awarded.

The potential of CBM as a primary energy

resource in India is being established and

increasingly efforts are being made to

commercialise the same. The proven CBM

reserves in India are equivalent to the Oil

and Natural gas reserves in India . At USD

4.2/mmbtu it translates to a USD 130 billion

opportunity.

1

Major Terms and conditions offered to the

bidders for Round four

• Fiscal stability provision in the contract

• No govt. participating interest

• No up-front payment

• No signature bonus required

• No customs duty on imports

• Freedom to sell gas domestically at

market-determined rates.

This sector has attracted public sector

enterprises – ONGC and GAIL, domestic

private sector companies – Great Eastern

Energy Corporation (GEECL), Reliance

Energy Ltd, Reliance Natural Resources Ltd,

Essar and foreign players – Arrow Energy,

BP Exploration, GeoPetrol etc . Some of the

companies have also entered into

commercial long term Gas Sale Agreement.

The policy regime is also favourable to

exploration and commercialisation of the

CBM opportunity in India.

2

5 Livemint.com, February 2010 (‘Bangladesh agrees to tri-nation gas pipeline’)

6 Infraline and Secondary Research

1 Integrated Energy Policy, Report of Expert Committee, Planning Commission, August, 2006 pipeline’)

2 KPMG Research

Btoe

Coal

2.0

4.0

6.0

8.0

10.0

12.0

14.0

13.49

1.220.79

1.100.77

Lignite Oil Gas CBM

07 08

Liquefied Natural Gas (LNG) trade has The LNG imports in India in 2008-09 were operational LNG terminals both located in

picked up significantly in recent years estimated at 30 mmscmd. This constituted Gujarat, one each in Dahej and Hazira, with

owing to increasing demand, declining about 29 percent of total natural gas supply total capacity of 12.5 MTPA .

domestic natural gas resources in gas- in India in 2008-09. Out of total LNG Besides the existing LNG terminals at

consuming countries and efforts of gas- imports, 63 percent was imported on firm Dahej and Hazira and their expansion plans,

producing countries to commercialise their contract basis while 37 percent was few other LNG terminals of combined

resources. The LNG market has also seen imported on the spot basis .capacity of 21 MTPA are planned to be

key developments in the past few years The historic demand-supply gap of natural added in India over the next few years.

including declining capital costs of LNG gas has provided an impetus in setting up

liquefaction plants and more flexibility in LNG terminals. Currently India has two

tenure and pricing of LNG Contracts

1

2

LIQUEFIED NATURAL GAS

Overall, India is expected to have LNG liquification, shipping and re-gassification. segments like Industrial consumers,

terminals of ~20 MTPA capacity by 2012 This leads to higher landed price for LNG to Petrochemical plants and CGD. The

and ~38.5 MTPA capacity once the consumers than most of the alternative proposed pooled pricing mechanism may

operations in all the proposed terminals fuels. also help in boosting the LNG demand in

commence. other sectors as well.One of the key drivers to improve LNG

Acceptability of natural gas as a fuel is demand in domestic market will be India's

dependent on its price vis-à-vis alternate ability to source long term LNG at

fuels. LNG is more expensive than competitive prices. At current prices, LNG

domestic gas due to the additional cost of may be cost efficient to few consumer

Sr. No. Terminal Promoter Capacity (MTPA) Expected timelines

1) Dabhol Ratnagiri Gas and Power Projects Ltd 5 2012

2) Kochi PLL 2.5 in Phase I To be increased to 5 beyond 2012

3) Mundra Adani Group and GSPC 6 2014

4) Ennore IOCL 2.5 2014

5) Mangalore ONGC 2.5 2014

Shale gas is natural gas produced from attention of a large number of nations like first of its kind in India. In order to truly

shale, which are fine-grained sedimentary Canada, Australia, China, Sweden, exploit the potential of shale gas in the

rocks formed by compaction of clay and Hungary, Germany, UK and India. country the following needs to be

other minerals. The shale formations act as expedited:In the Indian context, although more

both reservoir as well as source rock. Shale studies are required to assess the true • Technical assessment of shale deposits

formations have low matrix permeability potential of our geological basins, and identification of possible gas

and to produce gas in commercial prospects of large shale deposits exists producing areas

quantities it requires fractures to improve across the Cambay basin, Assam – Arakan

• Comprehensive policy on shale gas the permeability. Similarly, horizontal drilling basin, KG basin and Cauvery basin. India's

exploration, development and is often used with shale gas to create current policy on exploration doesn't cover

productionmaximum surface area in contact with the unconventional resources and hence a new

shale and hence improve gas recovery. • Participation from firms with technology policy especially for shale gas may be

and infrastructure to bring down costs The interest in shale gas really picked up required in the future. The fiscal and

of development and production. during 2005-06 when the Henry Hub prices contractual regime for such exploration is

were at an all time high . Over the last also something the government needs to Shale gas definitely is an opportunity in the decade, the costs of drilling and fracturing look at as the option could be between a near future and, if large resource bases are techniques have come down substantially royalty regime (like in US) and a Production established, it could be a big boost to a and now shale gas is able to compete even Sharing Contracts (conventional oil and gas country which needs energy security for a at prevailing lower gas prices. This has resources in India) . The government plans fast developing economy.resulted in huge negative impact on to launch the first round of Shale gas

imported LNG in the US and severe under bidding in mid 2011.

utilisation of the LNG regasification In anticipation of the above, some of the

terminals.major players have taken a keen interest in

This whole cycle of developing cost shale gas. Reliance has already acquired

efficient technologies to bring down the stakes in Marcellus shale and Eagle Ford

cost of monetising unconventional acreage in US . ONGC is carrying out a pilot

resources in the US has captured the project in the Damodar basin, which is the

1

1

1

A NOTE ON SHALE GAS

1 Crisil

2 Hazira and Dahej Terminal Website

1 Oil and Gas journal 2010

09 10

Liquefied Natural Gas (LNG) trade has The LNG imports in India in 2008-09 were operational LNG terminals both located in

picked up significantly in recent years estimated at 30 mmscmd. This constituted Gujarat, one each in Dahej and Hazira, with

owing to increasing demand, declining about 29 percent of total natural gas supply total capacity of 12.5 MTPA .

domestic natural gas resources in gas- in India in 2008-09. Out of total LNG Besides the existing LNG terminals at

consuming countries and efforts of gas- imports, 63 percent was imported on firm Dahej and Hazira and their expansion plans,

producing countries to commercialise their contract basis while 37 percent was few other LNG terminals of combined

resources. The LNG market has also seen imported on the spot basis .capacity of 21 MTPA are planned to be

key developments in the past few years The historic demand-supply gap of natural added in India over the next few years.

including declining capital costs of LNG gas has provided an impetus in setting up

liquefaction plants and more flexibility in LNG terminals. Currently India has two

tenure and pricing of LNG Contracts

1

2

LIQUEFIED NATURAL GAS

Overall, India is expected to have LNG liquification, shipping and re-gassification. segments like Industrial consumers,

terminals of ~20 MTPA capacity by 2012 This leads to higher landed price for LNG to Petrochemical plants and CGD. The

and ~38.5 MTPA capacity once the consumers than most of the alternative proposed pooled pricing mechanism may

operations in all the proposed terminals fuels. also help in boosting the LNG demand in

commence. other sectors as well.One of the key drivers to improve LNG

Acceptability of natural gas as a fuel is demand in domestic market will be India's

dependent on its price vis-à-vis alternate ability to source long term LNG at

fuels. LNG is more expensive than competitive prices. At current prices, LNG

domestic gas due to the additional cost of may be cost efficient to few consumer

Sr. No. Terminal Promoter Capacity (MTPA) Expected timelines

1) Dabhol Ratnagiri Gas and Power Projects Ltd 5 2012

2) Kochi PLL 2.5 in Phase I To be increased to 5 beyond 2012

3) Mundra Adani Group and GSPC 6 2014

4) Ennore IOCL 2.5 2014

5) Mangalore ONGC 2.5 2014

Shale gas is natural gas produced from attention of a large number of nations like first of its kind in India. In order to truly

shale, which are fine-grained sedimentary Canada, Australia, China, Sweden, exploit the potential of shale gas in the

rocks formed by compaction of clay and Hungary, Germany, UK and India. country the following needs to be

other minerals. The shale formations act as expedited:In the Indian context, although more

both reservoir as well as source rock. Shale studies are required to assess the true • Technical assessment of shale deposits

formations have low matrix permeability potential of our geological basins, and identification of possible gas

and to produce gas in commercial prospects of large shale deposits exists producing areas

quantities it requires fractures to improve across the Cambay basin, Assam – Arakan

• Comprehensive policy on shale gas the permeability. Similarly, horizontal drilling basin, KG basin and Cauvery basin. India's

exploration, development and is often used with shale gas to create current policy on exploration doesn't cover

productionmaximum surface area in contact with the unconventional resources and hence a new

shale and hence improve gas recovery. • Participation from firms with technology policy especially for shale gas may be

and infrastructure to bring down costs The interest in shale gas really picked up required in the future. The fiscal and

of development and production. during 2005-06 when the Henry Hub prices contractual regime for such exploration is

were at an all time high . Over the last also something the government needs to Shale gas definitely is an opportunity in the decade, the costs of drilling and fracturing look at as the option could be between a near future and, if large resource bases are techniques have come down substantially royalty regime (like in US) and a Production established, it could be a big boost to a and now shale gas is able to compete even Sharing Contracts (conventional oil and gas country which needs energy security for a at prevailing lower gas prices. This has resources in India) . The government plans fast developing economy.resulted in huge negative impact on to launch the first round of Shale gas

imported LNG in the US and severe under bidding in mid 2011.

utilisation of the LNG regasification In anticipation of the above, some of the

terminals.major players have taken a keen interest in

This whole cycle of developing cost shale gas. Reliance has already acquired

efficient technologies to bring down the stakes in Marcellus shale and Eagle Ford

cost of monetising unconventional acreage in US . ONGC is carrying out a pilot

resources in the US has captured the project in the Damodar basin, which is the

1

1

1

A NOTE ON SHALE GAS

1 Crisil

2 Hazira and Dahej Terminal Website

1 Oil and Gas journal 2010

09 10

Indian private sector was not allowed in the effects on the economy given that it is the market, they have found it difficult to

retailing of fuel up to 2002. Subsequently, main fuel for the movement of goods in sustain operations given the price

the government decided to open the sector India. regulation in place.

to private participation subject to certain In addition to this, the government also However, there are indications that private

restrictions. The government, with its aim announced a hike in prices of Petrol (MS), sector interest has renewed in this space.

of insulating the Indian consumer from Diesel (HSD), Kerosene and LPG. Petrol Recent media reports have shown that

volatility of crude oil prices in the currently accounts for only a tenth of all Shell India, the domestic arm of Royal

international markets, has been subsidising petroleum products consumed where as Dutch Shell Plc, plans to have 200 fuel

end-user prices of HSD, MS, SKO and LPG. diesel accounts for nearly one-third of all outlets by the end of FY 09-10 .

This has translated into a large subsidy products consumed within India.

The Indian fuel market does hold some being given to the domestic consumer,

Although this is a commendatory step, promise, more so if the market forces are with the burden being shared between the

even after this decision, the government allowed free reign as indicated by recent oil marketing firms, the government (which

and the public sector oil companies are measures. Another opportunity lies in has been issuing oil bonds to the PSU

expected to bear an estimated under- exploiting the potential of non-fuel retail at marketers to compensate them for their

recovery of about INR 53,000 crore as the existing fuel outlets, particularly given under-recoveries) and the upstream PSU

opposed to INR 74,000 crore in revenues in the prime location of fuel outlets at metros. firms of ONGC and OIL.

2010-11 fiscal. Convenience shopping and the In June 2010, a major step was taken in the

establishment of ATMs provide an area of moving towards market determined

opportunity. Fuel retailing outlets with such pricing. The government through its

additional facilities are also likely to invest Empowered Group of Ministers (EGoM) led

in modernisation and branding initiatives, by the Finance Minister of India, Pranab The fuel retail market in India continues to

with 'Club HP' of HPCL being one such Mukherjee decided to give a free hand to be dominated by PSU firms with Indian Oil

initiative.oil companies to determine petrol (MS) boasting of an approximately 50 percent

prices in line with the market price market share, while the other public sector

following the Kirit Parikh Committee fuel marketers HPCL and BPCL have five

recommendations . Diesel prices, however, and approximately 25 percent market share

were not allowed the same freedom, each. Although the private sector firms of

arguably, due to the significant inflationary RIL, Essar and Shell have entered the

1

1

Outlook for fuel retaling

FUEL RETAILING IN INDIA

Direct tax41

2

3

• Taxation of a person depends upon its • MAT is applicable to a company, if tax India has a federal level tax structure legal status (a person being an payable by the company on its total governed by the provisions of the Income individual, firm, company, etc.) and income, as computed under the normal Tax Act, 1961. It has a network of treaties residential status provisions, is less than 18 percent of its with over 90 countries across the globe to

book profitsavoid double taxation of income. In wake of • Indian tax system recognises an entity economic reforms, the taxation system has level taxation. • In computing 'book profits' for MAT undergone tremendous changes in the past purposes, certain positive and negative ten years. The tax rates have been adjustments are made to the net profit rationalised and compared favourably with as shown in the books of accountmany other countries. Further, over the

• For Indian income tax purposes, a • Carry forward and set off of MAT is period of time, the tax laws have also been

corporation income comprises income available for 10 subsequent years.simplified to ensure better compliances.

from business or property, capital gains

The brief overview of India taxation system realised on any disposition of

is outlined below: corporation’s capital assets and residual

income arising from non-business

income.

• A resident in India is liable to tax on its

world wide income irrespective of the

source of income • Domestic companies are subject to tax

at the rate of 30 percent whereas • A non resident in India is liable to tax on

foreign companies are subject to tax at income received or deemed to be

the rate of 40 percent received in India or any income accruing

or arising or deemed to be accruing or • The tax rate is enhanced by surcharge &

arising in India. education cess as may be applicable to

the tax payer.

Scheme of taxation Minimum alternate tax (MAT)

Corporate income-tax

Scope of total income

Corporate tax rate

OVERVIEW OF THE INDIAN TAXATION SYSTEM

1 Indian Income-tax Act, 1961

2 Section 5 of Indian Income-tax Act, 1961

3 Finance Act, 2010

4 Section 115JB of Indian Income-tax Act, 1961

1 Business Standard

11 12

Indian private sector was not allowed in the effects on the economy given that it is the market, they have found it difficult to

retailing of fuel up to 2002. Subsequently, main fuel for the movement of goods in sustain operations given the price

the government decided to open the sector India. regulation in place.

to private participation subject to certain In addition to this, the government also However, there are indications that private

restrictions. The government, with its aim announced a hike in prices of Petrol (MS), sector interest has renewed in this space.

of insulating the Indian consumer from Diesel (HSD), Kerosene and LPG. Petrol Recent media reports have shown that

volatility of crude oil prices in the currently accounts for only a tenth of all Shell India, the domestic arm of Royal

international markets, has been subsidising petroleum products consumed where as Dutch Shell Plc, plans to have 200 fuel

end-user prices of HSD, MS, SKO and LPG. diesel accounts for nearly one-third of all outlets by the end of FY 09-10 .

This has translated into a large subsidy products consumed within India.

The Indian fuel market does hold some being given to the domestic consumer,

Although this is a commendatory step, promise, more so if the market forces are with the burden being shared between the

even after this decision, the government allowed free reign as indicated by recent oil marketing firms, the government (which

and the public sector oil companies are measures. Another opportunity lies in has been issuing oil bonds to the PSU

expected to bear an estimated under- exploiting the potential of non-fuel retail at marketers to compensate them for their

recovery of about INR 53,000 crore as the existing fuel outlets, particularly given under-recoveries) and the upstream PSU

opposed to INR 74,000 crore in revenues in the prime location of fuel outlets at metros. firms of ONGC and OIL.

2010-11 fiscal. Convenience shopping and the In June 2010, a major step was taken in the

establishment of ATMs provide an area of moving towards market determined

opportunity. Fuel retailing outlets with such pricing. The government through its

additional facilities are also likely to invest Empowered Group of Ministers (EGoM) led

in modernisation and branding initiatives, by the Finance Minister of India, Pranab The fuel retail market in India continues to

with 'Club HP' of HPCL being one such Mukherjee decided to give a free hand to be dominated by PSU firms with Indian Oil

initiative.oil companies to determine petrol (MS) boasting of an approximately 50 percent

prices in line with the market price market share, while the other public sector

following the Kirit Parikh Committee fuel marketers HPCL and BPCL have five

recommendations . Diesel prices, however, and approximately 25 percent market share

were not allowed the same freedom, each. Although the private sector firms of

arguably, due to the significant inflationary RIL, Essar and Shell have entered the

1

1

Outlook for fuel retaling

FUEL RETAILING IN INDIA

Direct tax41

2

3

• Taxation of a person depends upon its • MAT is applicable to a company, if tax India has a federal level tax structure legal status (a person being an payable by the company on its total governed by the provisions of the Income individual, firm, company, etc.) and income, as computed under the normal Tax Act, 1961. It has a network of treaties residential status provisions, is less than 18 percent of its with over 90 countries across the globe to

book profitsavoid double taxation of income. In wake of • Indian tax system recognises an entity economic reforms, the taxation system has level taxation. • In computing 'book profits' for MAT undergone tremendous changes in the past purposes, certain positive and negative ten years. The tax rates have been adjustments are made to the net profit rationalised and compared favourably with as shown in the books of accountmany other countries. Further, over the

• For Indian income tax purposes, a • Carry forward and set off of MAT is period of time, the tax laws have also been

corporation income comprises income available for 10 subsequent years.simplified to ensure better compliances.

from business or property, capital gains

The brief overview of India taxation system realised on any disposition of

is outlined below: corporation’s capital assets and residual

income arising from non-business

income.

• A resident in India is liable to tax on its

world wide income irrespective of the

source of income • Domestic companies are subject to tax

at the rate of 30 percent whereas • A non resident in India is liable to tax on

foreign companies are subject to tax at income received or deemed to be

the rate of 40 percent received in India or any income accruing

or arising or deemed to be accruing or • The tax rate is enhanced by surcharge &

arising in India. education cess as may be applicable to

the tax payer.

Scheme of taxation Minimum alternate tax (MAT)

Corporate income-tax

Scope of total income

Corporate tax rate

OVERVIEW OF THE INDIAN TAXATION SYSTEM

1 Indian Income-tax Act, 1961

2 Section 5 of Indian Income-tax Act, 1961

3 Finance Act, 2010

4 Section 115JB of Indian Income-tax Act, 1961

1 Business Standard

11 12

Key indirect taxes12

VAT legislation Custom dutyService tax

Excise duty

• Since its inception in April 2005, VAT • Custom Duty is payable on import of • Service tax is applicable on identified has been implemented in almost all goods/ equipments into Indiaservices provided or received in IndiaIndian States and Union Territories with

• It is levied as per rates specified in the • Current scope of taxable services is exception of Andaman and Nicobar and Customs Tariff laws depending upon the very wide and covers a vast majority of Lakshadweepprescribed HSN classificationservice categories

• VAT is a multi-point taxation system • Peak rate of Customs Duty is 10 • Mining, Survey & exploration of entailing a VAT at every point of sale and

percent.minerals, Transportation, , scientific and sale includes transfer of right to use technical consultancy, construction, IPR, goods and transfer of property in goods insurance, manpower supply, in the course of execution of works telecommunication, online database contractsaccess, training, business auxiliary • Generally levied at the rate of 10

• Dealers are allowed to avail credit of services are some of the key categories percent plus education cess of 3 input VAT paid on inputs and capital

percent on manufacture of goods• Service tax is applicable at 10.30 goods for set-off against output VAT/

percent • Payable at the time of removal of goods CSTfrom factory gate

• Export of services are not subject to • Common rate of tax adopted across all service tax - export determined as per • Excise duty paid by the buyer to the States with rates generally ranging from prescribed rules seller is available as input credit and may 4percent to 15percent for different

be utilized to set-off the buyer’s output categories of goods. Also, some • Import of service liable to service tax in Excise duty/ Service tax liabilitycategory of goods have been declared hands of recipient in India - import

exempt from levy of State VATdetermined as per prescribed rules.

• Interstate sale of goods is subject to a

CST levy and currently applicable at 2%

subject to conditions. CST is a non-

creditable levy.

Dividend distribution tax (DDT)5

• DDT is levied at the rate of 16.609

percent on the amount of dividend

declared, distributed or paid by an Indian

company

• DDT is payable in addition to regular

corporate income tax.

Taxation of individuals10

• Taxability of an individual is dependent on

his/her residential status

• The residential status of an individual is

determined on the basis of his/her

physical presence in India

• Based on the satisfaction of certain

conditions, an individual could be:

- Resident and ordinarily resident (ROR)

- Resident but not ordinarily resident

(RNOR)

- Non-resident (NR)

• Income of non-resident is generally

computed in the same manner as the

resident.

Taxability

Residential Status

Worldwide income Indian income

Received in India Received outside India Received in India Received outside India

ROR ü ü ü ü

RNOR* ü û ü ü

NR ü û ü ü

Tax rates applicable for the financial year 11

2010-2011

Taxable Income Rate percent

Upto 160000* Nil

160,001 - 500,000 10%

500,001 - 800,000 20%

Above 800,001 30%

Transfer pricing regulations7

• India has a Transfer Pricing regime under

which international transactions between

associated enterprises are required to be

computed with regard to their arm's

length price. These regulations also apply

to cost sharing arrangements

• Transfer Pricing Regulations prescribes

the information and documents which

are required to be maintained by every

person who has entered into an

international transaction with its

associated enterprises.

Other features8

9

• Loss carry forward permitted upto eight

years, however, depreciation can be

carried forward indefinitely

• No tax on remittance of profits by foreign

companies (project office/branch office to

head office) .

* Income derived by a RNOR from a business controlled or profession set up in India shall be taxable in India

* In the case of resident woman below the age of 65

years the basic exemption limit is 190,000

* In case of resident individual of the age of 65 or

above the basic exemption limit is 240,000

* Surcharge is not applicable

* Education cess is applicable at the rate of 3

percent on income tax

Corporate tax rates at glance6

Rates applicable for the financial year 2010-2011 are as follows:

ResourcesDomestic Corporation

Foreign Corporation

Corporate tax rate 33.22%* 42.23%*

Minimum Alternate tax 19.93%* 19.0035%*

Dividend Distribution tax 16.609% N.A.

Branch Profit Tax NA NA

*In case net income exceeds 10 million

5 Section 115-O of Indian Income-tax Act, 1961

6 Finance Act 2010

7 Chapter X of Indian Income-tax Act, 1961

8 Section 72 and Section 32 of Indian Income-tax Act, 1961

9 Indian Income-tax Act, 1961 and the Exchange Control / Regulatory provisions

10Section 6 of Indian Income-tax Act, 1961

11Finance Act 2010

12Comprises of relevant provisions of Finance Act, 1994, The Customs Act, 1962 and State-specific VAT legislations, as amended from time to time, the rules and regulations thereunder

13 14

Key indirect taxes12

VAT legislation Custom dutyService tax

Excise duty

• Since its inception in April 2005, VAT • Custom Duty is payable on import of • Service tax is applicable on identified has been implemented in almost all goods/ equipments into Indiaservices provided or received in IndiaIndian States and Union Territories with

• It is levied as per rates specified in the • Current scope of taxable services is exception of Andaman and Nicobar and Customs Tariff laws depending upon the very wide and covers a vast majority of Lakshadweepprescribed HSN classificationservice categories

• VAT is a multi-point taxation system • Peak rate of Customs Duty is 10 • Mining, Survey & exploration of entailing a VAT at every point of sale and

percent.minerals, Transportation, , scientific and sale includes transfer of right to use technical consultancy, construction, IPR, goods and transfer of property in goods insurance, manpower supply, in the course of execution of works telecommunication, online database contractsaccess, training, business auxiliary • Generally levied at the rate of 10

• Dealers are allowed to avail credit of services are some of the key categories percent plus education cess of 3 input VAT paid on inputs and capital

percent on manufacture of goods• Service tax is applicable at 10.30 goods for set-off against output VAT/

percent • Payable at the time of removal of goods CSTfrom factory gate

• Export of services are not subject to • Common rate of tax adopted across all service tax - export determined as per • Excise duty paid by the buyer to the States with rates generally ranging from prescribed rules seller is available as input credit and may 4percent to 15percent for different

be utilized to set-off the buyer’s output categories of goods. Also, some • Import of service liable to service tax in Excise duty/ Service tax liabilitycategory of goods have been declared hands of recipient in India - import

exempt from levy of State VATdetermined as per prescribed rules.

• Interstate sale of goods is subject to a

CST levy and currently applicable at 2%

subject to conditions. CST is a non-

creditable levy.

Dividend distribution tax (DDT)5

• DDT is levied at the rate of 16.609

percent on the amount of dividend

declared, distributed or paid by an Indian

company

• DDT is payable in addition to regular

corporate income tax.

Taxation of individuals10

• Taxability of an individual is dependent on

his/her residential status

• The residential status of an individual is

determined on the basis of his/her

physical presence in India

• Based on the satisfaction of certain

conditions, an individual could be:

- Resident and ordinarily resident (ROR)

- Resident but not ordinarily resident

(RNOR)

- Non-resident (NR)

• Income of non-resident is generally

computed in the same manner as the

resident.

Taxability

Residential Status

Worldwide income Indian income

Received in India Received outside India Received in India Received outside India

ROR ü ü ü ü

RNOR* ü û ü ü

NR ü û ü ü

Tax rates applicable for the financial year 11

2010-2011

Taxable Income Rate percent

Upto 160000* Nil

160,001 - 500,000 10%

500,001 - 800,000 20%

Above 800,001 30%

Transfer pricing regulations7

• India has a Transfer Pricing regime under

which international transactions between

associated enterprises are required to be

computed with regard to their arm's

length price. These regulations also apply

to cost sharing arrangements

• Transfer Pricing Regulations prescribes

the information and documents which

are required to be maintained by every

person who has entered into an

international transaction with its

associated enterprises.

Other features8

9

• Loss carry forward permitted upto eight

years, however, depreciation can be

carried forward indefinitely

• No tax on remittance of profits by foreign

companies (project office/branch office to

head office) .

* Income derived by a RNOR from a business controlled or profession set up in India shall be taxable in India

* In the case of resident woman below the age of 65

years the basic exemption limit is 190,000

* In case of resident individual of the age of 65 or

above the basic exemption limit is 240,000

* Surcharge is not applicable

* Education cess is applicable at the rate of 3

percent on income tax

Corporate tax rates at glance6

Rates applicable for the financial year 2010-2011 are as follows:

ResourcesDomestic Corporation

Foreign Corporation

Corporate tax rate 33.22%* 42.23%*

Minimum Alternate tax 19.93%* 19.0035%*

Dividend Distribution tax 16.609% N.A.

Branch Profit Tax NA NA

*In case net income exceeds 10 million

5 Section 115-O of Indian Income-tax Act, 1961

6 Finance Act 2010

7 Chapter X of Indian Income-tax Act, 1961

8 Section 72 and Section 32 of Indian Income-tax Act, 1961

9 Indian Income-tax Act, 1961 and the Exchange Control / Regulatory provisions

10Section 6 of Indian Income-tax Act, 1961

11Finance Act 2010

12Comprises of relevant provisions of Finance Act, 1994, The Customs Act, 1962 and State-specific VAT legislations, as amended from time to time, the rules and regulations thereunder

13 14

• PSC also lay down the manner of service, in relation to location or

deduction as: exploration of deposits of mineral, oil • There is a special tax regime for non-

or gas- Allowable expenditure is aggregated till resident service providers engaged in

the commencement of commercial • Site formation and clearance services the business of providing services or

production (effective from 16 June 2005)facilities or supplying plant and

machinery on hire in connection with - Accumulated expenditure allowed in the - Includes drilling, boring and core prospecting for, or extraction or year of commencement of commercial extraction services in relation to site production of, mineral oils.production or permitted to be amortized formation and clearance, excavation

over a period of 10 years. and earth moving and demolition• Ten percent of the gross receipts

deemed to be business income • Mining services (effective from 1 June resulting in an effective tax rate of 2007)4.223 percent of gross revenues (rate

- Introduced to tax 'any service provided as applicable for financial year 2010-All unsuccessful exploration costs in other in relation to mining of minerals, oil & 2011)contract areas can be set off against gas’

income in the contract area in which • The tax payer has an option to claim commercial production has commenced. • Commercial or industrial constructionlower profits, subject to following

conditions: - Includes construction of well head and

civil works at site.- Keep/maintain books/documents

• Service tax also leviable on the - Get accounts tax audited• Hundred percent tax holiday available in following services:

respect of profits earned from - Furnish tax audit report- Dredging servicesproduction of mineral oils.

- Compulsory scrutiny assessment.- Technical testing and analysis• Hundred percent tax holiday available in

respect of profits earned from - Pipeline transportation

production of natural gas from the

- Cleaning (including services for tank, blocks licensed under NELP VIII and • Subject to certain procedures and reservoir of commercial or industrial CBM IV

conditions, Custom Duty exemption is building and premise).• Tax holiday is available for seven available for:

consecutive years from the year of • Equipments etc. imported for exclusive

commencement of commercial use in petroleum operations

production.• Equipment and machinery procured for • Specified goods required in connection

• However, companies availing deduction exploration and production operations with petroleum operations under under these provisions would still be are eligible for deemed export benefits specific exemption notificationliable to pay MAT on 'book profits'. which include Excise duty drawback/

• Parts and raw materials for manufacture exemption / advance authorization.of goods for the purpose of off-shore

petroleum operations undertaken under

specified contracts.• Special deduction is available for

contribution to site restoration fund

• Amount of deduction being lower of: Relevant Service Tax Category

- Sum deposited either in a special • Survey and exploration of mineral, oil &

account or in a "Site Restoration gas services (effective from 10

Account" or September 2004)

- Twenty percent of the profits - Includes geological, geophysical or

calculated in the prescribed manner. other prospecting, surface and

subsurface surveying or map making

Taxation of service providers

No ring fencing of expenditure

Tax holiday

Custom duty

Excise duty

Deductibility of site restoration fund

Service tax

16

14

17

15

18

18The Finance Act, 1994 and the rules and regulations thereunder

16Section 44BB of Indian Income-tax Act, 1961

17Custom Act, 1962 and the rules and regulations thereunder

15 16

REGULATORY AND TAX REGIME FOR UPSTREAM SECTOR

Regulatory and tax regime for

upstream sector13

India also provides a customized tax • Specific allowances [in addition or in lieu

regime for the upstream sector and non- of allowances under normal provisions] India also provides a customized tax

resident service providers in relation to as specified in the PSC are permitted.regime for the upstream sector and non-

Exploration and Production operations. resident service providers in relation to • The specific allowances relate to:

Exploration & Production operations. There is a special mechanism for taxation - Expenditure by way of infructuous or

of income of companies which have A brief overview of the regulatory and tax abortive exploration

entered into a Production Sharing Contract regime for upstream sector is outlined

- Expenditure incurred for exploration or (PSC) with the Government of India for below:

drilling activities or services or assets undertaking exploration and production

used for these activities.activities.

• As per these provisions, taxable profits

of a tax payer, who has entered into a • FDI up-to 100 percent permitted under

PSC with the Government for automatic route (i.e. without approval) in

• Hundred percent deduction of participation in the business of exploration activities of oil and natural

exploration and drilling expenses (both prospecting, exploration or production of gas fields, infrastructure related to

capital and revenue allowed) and other mineral oil, to be determined in marketing of petroleum products, actual

expenses (including production accordance with the special provisions trading and marketing of petroleum

expenditure) allowed under normal contained in the PSCproducts, market study and formulation.

provisions of the Income-tax ActThis will however be subject to the • The provisions of the domestic tax law

existing sectoral policy are deemed to be modified to that

extent.• A foreign company can setup a project

office or an Indian company for

undertaking upstream operations in

India.

Income tax Special provision

Regulatory

PSC

14Section 80IB(9) of Indian Income-tax Act, 1961

15Section 33ABA of Indian Income-tax Act, 1961

13Comprises of Foreign Direct Investment Guidelines, Section 42 of Indian Income-tax Act, 1961, Article 17 of PSC and relevant indirect tax provisions

• PSC also lay down the manner of service, in relation to location or

deduction as: exploration of deposits of mineral, oil • There is a special tax regime for non-

or gas- Allowable expenditure is aggregated till resident service providers engaged in

the commencement of commercial • Site formation and clearance services the business of providing services or

production (effective from 16 June 2005)facilities or supplying plant and

machinery on hire in connection with - Accumulated expenditure allowed in the - Includes drilling, boring and core prospecting for, or extraction or year of commencement of commercial extraction services in relation to site production of, mineral oils.production or permitted to be amortized formation and clearance, excavation

over a period of 10 years. and earth moving and demolition• Ten percent of the gross receipts

deemed to be business income • Mining services (effective from 1 June resulting in an effective tax rate of 2007)4.223 percent of gross revenues (rate

- Introduced to tax 'any service provided as applicable for financial year 2010-All unsuccessful exploration costs in other in relation to mining of minerals, oil & 2011)contract areas can be set off against gas’

income in the contract area in which • The tax payer has an option to claim commercial production has commenced. • Commercial or industrial constructionlower profits, subject to following

conditions: - Includes construction of well head and

civil works at site.- Keep/maintain books/documents

• Service tax also leviable on the - Get accounts tax audited• Hundred percent tax holiday available in following services:

respect of profits earned from - Furnish tax audit report- Dredging servicesproduction of mineral oils.

- Compulsory scrutiny assessment.- Technical testing and analysis• Hundred percent tax holiday available in

respect of profits earned from - Pipeline transportation

production of natural gas from the

- Cleaning (including services for tank, blocks licensed under NELP VIII and • Subject to certain procedures and reservoir of commercial or industrial CBM IV

conditions, Custom Duty exemption is building and premise).• Tax holiday is available for seven available for:

consecutive years from the year of • Equipments etc. imported for exclusive

commencement of commercial use in petroleum operations

production.• Equipment and machinery procured for • Specified goods required in connection

• However, companies availing deduction exploration and production operations with petroleum operations under under these provisions would still be are eligible for deemed export benefits specific exemption notificationliable to pay MAT on 'book profits'. which include Excise duty drawback/

• Parts and raw materials for manufacture exemption / advance authorization.of goods for the purpose of off-shore

petroleum operations undertaken under

specified contracts.• Special deduction is available for

contribution to site restoration fund

• Amount of deduction being lower of: Relevant Service Tax Category

- Sum deposited either in a special • Survey and exploration of mineral, oil &

account or in a "Site Restoration gas services (effective from 10

Account" or September 2004)

- Twenty percent of the profits - Includes geological, geophysical or

calculated in the prescribed manner. other prospecting, surface and

subsurface surveying or map making

Taxation of service providers

No ring fencing of expenditure

Tax holiday

Custom duty

Excise duty

Deductibility of site restoration fund

Service tax

16

14

17

15

18

18The Finance Act, 1994 and the rules and regulations thereunder

16Section 44BB of Indian Income-tax Act, 1961

17Custom Act, 1962 and the rules and regulations thereunder

15 16

REGULATORY AND TAX REGIME FOR UPSTREAM SECTOR

Regulatory and tax regime for

upstream sector13

India also provides a customized tax • Specific allowances [in addition or in lieu

regime for the upstream sector and non- of allowances under normal provisions] India also provides a customized tax

resident service providers in relation to as specified in the PSC are permitted.regime for the upstream sector and non-

Exploration and Production operations. resident service providers in relation to • The specific allowances relate to:

Exploration & Production operations. There is a special mechanism for taxation - Expenditure by way of infructuous or

of income of companies which have A brief overview of the regulatory and tax abortive exploration

entered into a Production Sharing Contract regime for upstream sector is outlined

- Expenditure incurred for exploration or (PSC) with the Government of India for below:

drilling activities or services or assets undertaking exploration and production

used for these activities.activities.

• As per these provisions, taxable profits

of a tax payer, who has entered into a • FDI up-to 100 percent permitted under

PSC with the Government for automatic route (i.e. without approval) in

• Hundred percent deduction of participation in the business of exploration activities of oil and natural

exploration and drilling expenses (both prospecting, exploration or production of gas fields, infrastructure related to

capital and revenue allowed) and other mineral oil, to be determined in marketing of petroleum products, actual

expenses (including production accordance with the special provisions trading and marketing of petroleum

expenditure) allowed under normal contained in the PSCproducts, market study and formulation.

provisions of the Income-tax ActThis will however be subject to the • The provisions of the domestic tax law

existing sectoral policy are deemed to be modified to that

extent.• A foreign company can setup a project

office or an Indian company for

undertaking upstream operations in

India.

Income tax Special provision

Regulatory

PSC

14Section 80IB(9) of Indian Income-tax Act, 1961

15Section 33ABA of Indian Income-tax Act, 1961

13Comprises of Foreign Direct Investment Guidelines, Section 42 of Indian Income-tax Act, 1961, Article 17 of PSC and relevant indirect tax provisions

Proposed legisation - Direct Tax

Code Bill 2010 • Provisions related to Controlled Foreign

Corporations (CFC) have been • Income of non-resident service In an attempt to simplify the direct tax

introduced and it gets attracted when a providers engaged in the business of provisions, the government proposes to

foreign company is controlled by providing services or facilities or replace the existing tax regime with the

resident tax payers.supplying plant and machinery on hire in new Direct Tax Code Bill, 2010 (DTC). The

• The DTC provides for General Anti- connection with prospecting for, or DTC is likely to be effective from 1 April

Avoidance Rules (GAAR) provisions extraction or production of, mineral oils 2010 and the key features are as under:

which empower the revenue authorities and mineral oil is classified as Special • Income has been proposed to be

with sweeping powers to declare any Source incomeclassified into two broad group (i)

arrangement impermissible if entered • 14 percent of the gross receipts Income from Ordinary Sources and (ii)

with the objective of obtaining a tax deemed to be business income Income from Special Sources.

benefit and lacks commercial resulting in an effective tax rate of 4.2

• The tax rate for companies (domestic as substance.percent of gross revenues (at tax rate of

well as foreign companies ) have been 30 percent)

pegged at 30 percent. In addition,

• The tax payer has an option to claim foreign companies are also liable to a 15

lower profits, subject to following percent branch profit tax (BPT) on post DTC has proposed specific tax regime for

conditions:tax income the upstream sector (Schedule Eleventh)

- Keep/maintain books/documents• MAT applicable to a companies, if tax and non-resident service providers

payable by the company on its total (Schedule Fourteenth) in relation to - Get accounts tax auditedincome, as computed under the normal Exploration & Production operations. Key

- Furnish tax audit reportprovisions, is less than 20 percent of its features of the DTC provisions are as under

book profits. Carry forward and set off - Compulsory scrutiny assessment.• Income from business of exploration of MAT is available for 15 subsequent

and production of mineral oil is years

classified as Special Source income

• DDT is levied at the rate of 15 percent • Specific computation mechanism

on the amount of dividend declared, prescribed in Schedule Eleventh

distributed or paid by an Indian company

• Deduction for capital expenditure and • Corporate tax rates at a glance:

revenue expenditure, infructuous and

abortive expenditure allowed

• Deduction for deposit made to Site

Restoration Fund

• Profit-linked deductions are replaced

with investment based incentives are

introduced

• DTC provides for grandfathering of tax

holiday available to oil and gas

undertaking which are eligible for such

benefit under the present tax regime.

Taxation of service providers

Tax regime for upstream sector

Proposed legisation - Goods and

services tax

Although, the precise impact of GST on Oil • The Finance Minister while presenting and Gas sector needs to be analyzed in the Union Budget 2010-11 expressed light of the GST provisions, in due course the Government's 'earnest endeavour' of time, the following is the likely impact on to roll out GST on 1 April 2011, however, the same, based on the existing due to lack of consensus between information in the public domain: States and Centre, the said deadline

may be extended • Likely increase/ change in tax rates of

goods and services with a proposed • GST would be a destination-based tax GST rate of 20/16 percentlevied on consumption, applicable on a

comprehensive base of both goods and • Stock transfers are likely to be taxable services under GST at par with inter-state

supplies• GST in India is proposed to be a dual

levy (i.e. Centre and State level) and is • Fate of existing Customs/ Excise duty likely to subsume most, if not all, of the exemptions for equipment unclear in current Central and State levies like light of overall intent of GSTExcise duty, VAT/ CST, Service tax, etc.

• Imports to be brought under the GST • Free flow of credits are proposed under net for the first time

GST regime (i.e., input taxes paid on • Concessional CST rate (2 percent) on

procurement of goods and services can inter-state purchases likely to be

be set off against output taxes payable discontinued

on supply/ provision of goods/ services)

• The definition of 'India' may be widened • Whether petroleum products would be

under GST regime to cover all the off-included in GST ambit is still uncertain.

shore supply of goods and services

within the Exclusive Economic Zones.

Key areas of relevance under the

proposed GST regime

ResourcesDomestic

CorporationForeign

Corporation

Corporate tax rate 30% 30%

Minimum Alternate tax

20% 20%

Dividend Distribution tax

15% N.A.

Branch Profits Tax N.A. 15%

17 18

Proposed legisation - Direct Tax

Code Bill 2010 • Provisions related to Controlled Foreign

Corporations (CFC) have been • Income of non-resident service In an attempt to simplify the direct tax

introduced and it gets attracted when a providers engaged in the business of provisions, the government proposes to

foreign company is controlled by providing services or facilities or replace the existing tax regime with the

resident tax payers.supplying plant and machinery on hire in new Direct Tax Code Bill, 2010 (DTC). The

• The DTC provides for General Anti- connection with prospecting for, or DTC is likely to be effective from 1 April

Avoidance Rules (GAAR) provisions extraction or production of, mineral oils 2010 and the key features are as under:

which empower the revenue authorities and mineral oil is classified as Special • Income has been proposed to be

with sweeping powers to declare any Source incomeclassified into two broad group (i)

arrangement impermissible if entered • 14 percent of the gross receipts Income from Ordinary Sources and (ii)

with the objective of obtaining a tax deemed to be business income Income from Special Sources.

benefit and lacks commercial resulting in an effective tax rate of 4.2

• The tax rate for companies (domestic as substance.percent of gross revenues (at tax rate of

well as foreign companies ) have been 30 percent)

pegged at 30 percent. In addition,

• The tax payer has an option to claim foreign companies are also liable to a 15

lower profits, subject to following percent branch profit tax (BPT) on post DTC has proposed specific tax regime for

conditions:tax income the upstream sector (Schedule Eleventh)

- Keep/maintain books/documents• MAT applicable to a companies, if tax and non-resident service providers

payable by the company on its total (Schedule Fourteenth) in relation to - Get accounts tax auditedincome, as computed under the normal Exploration & Production operations. Key

- Furnish tax audit reportprovisions, is less than 20 percent of its features of the DTC provisions are as under

book profits. Carry forward and set off - Compulsory scrutiny assessment.• Income from business of exploration of MAT is available for 15 subsequent

and production of mineral oil is years

classified as Special Source income

• DDT is levied at the rate of 15 percent • Specific computation mechanism

on the amount of dividend declared, prescribed in Schedule Eleventh

distributed or paid by an Indian company

• Deduction for capital expenditure and • Corporate tax rates at a glance:

revenue expenditure, infructuous and

abortive expenditure allowed

• Deduction for deposit made to Site

Restoration Fund

• Profit-linked deductions are replaced

with investment based incentives are

introduced

• DTC provides for grandfathering of tax

holiday available to oil and gas

undertaking which are eligible for such

benefit under the present tax regime.

Taxation of service providers

Tax regime for upstream sector

Proposed legisation - Goods and

services tax

Although, the precise impact of GST on Oil • The Finance Minister while presenting and Gas sector needs to be analyzed in the Union Budget 2010-11 expressed light of the GST provisions, in due course the Government's 'earnest endeavour' of time, the following is the likely impact on to roll out GST on 1 April 2011, however, the same, based on the existing due to lack of consensus between information in the public domain: States and Centre, the said deadline

may be extended • Likely increase/ change in tax rates of

goods and services with a proposed • GST would be a destination-based tax GST rate of 20/16 percentlevied on consumption, applicable on a

comprehensive base of both goods and • Stock transfers are likely to be taxable services under GST at par with inter-state

supplies• GST in India is proposed to be a dual

levy (i.e. Centre and State level) and is • Fate of existing Customs/ Excise duty likely to subsume most, if not all, of the exemptions for equipment unclear in current Central and State levies like light of overall intent of GSTExcise duty, VAT/ CST, Service tax, etc.

• Imports to be brought under the GST • Free flow of credits are proposed under net for the first time

GST regime (i.e., input taxes paid on • Concessional CST rate (2 percent) on

procurement of goods and services can inter-state purchases likely to be

be set off against output taxes payable discontinued

on supply/ provision of goods/ services)

• The definition of 'India' may be widened • Whether petroleum products would be

under GST regime to cover all the off-included in GST ambit is still uncertain.

shore supply of goods and services

within the Exclusive Economic Zones.

Key areas of relevance under the

proposed GST regime

ResourcesDomestic

CorporationForeign

Corporation

Corporate tax rate 30% 30%

Minimum Alternate tax

20% 20%

Dividend Distribution tax

15% N.A.

Branch Profits Tax N.A. 15%

17 18

Appendix I: Map of Existing and Proposed Gas PipelinesAppendix II: Existing and Proposed LNG Terminals

Ennore (2.5mpta)

Dahej I&II (10mtpa)

Dahej III (2.5mtpa)

Mundra (6mtpa)

Hazira I (2.5mtpa)

Hazira II (2.5mtpa)

Dabhol (5mtpa)

Mangalore (2.5mtpa)

Expected to come up after FY 12

Expected to come up by FY 12

Kochi (2.5mtpa)

Kochi (2.5mtpa)

Existing LNG Terminal

Proposed LNG Terminal

Source: KPMG Analysis

19 20

Source: PNGRB

Appendix I: Map of Existing and Proposed Gas PipelinesAppendix II: Existing and Proposed LNG Terminals

Ennore (2.5mpta)

Dahej I&II (10mtpa)

Dahej III (2.5mtpa)

Mundra (6mtpa)

Hazira I (2.5mtpa)

Hazira II (2.5mtpa)

Dabhol (5mtpa)

Mangalore (2.5mtpa)

Expected to come up after FY 12

Expected to come up by FY 12

Kochi (2.5mtpa)

Kochi (2.5mtpa)

Existing LNG Terminal

Proposed LNG Terminal

Source: KPMG Analysis

19 20

Source: PNGRB

KPMG is a global network of KPMG in India, the audit, tax and The firms in India have access to more

professional firms providing Audit, Tax advisory firm, is the Indian member than 3000 Indian and expatriate

and Advisory services. We operate in firm of KPMG International professionals, many of whom are

146 countries and have 140,000 Cooperative (“KPMG International.”) internationally trained. We strive to

people working in member firms was established in September 1993. provide rapid, performance-based,

around the world. The independent As members of a cohesive business industry-focused and technology-

member firms of the KPMG network unit they respond to a client service enabled services, which reflect a

are affiliated with KPMG International environment by leveraging the shared knowledge of global and local

Cooperative (“KPMG International”), a resources of a global network of firms, industries and our experience of the

Swiss entity. Each KPMG firm is a providing detailed knowledge of local Indian business environment.

legally distinct and separate entity and laws, regulations, markets and

describes itself as such. competition. We provide services to

over 2,000 international and national

clients, in India. KPMG has offices in

India in Mumbai, Delhi, Bangalore,

Chennai, Hyderabad, Kolkata, Pune

and Kochi.

ABOUT KPMG IN INDIA

21

KPMG is a global network of KPMG in India, the audit, tax and The firms in India have access to more

professional firms providing Audit, Tax advisory firm, is the Indian member than 3000 Indian and expatriate

and Advisory services. We operate in firm of KPMG International professionals, many of whom are

146 countries and have 140,000 Cooperative (“KPMG International.”) internationally trained. We strive to

people working in member firms was established in September 1993. provide rapid, performance-based,

around the world. The independent As members of a cohesive business industry-focused and technology-

member firms of the KPMG network unit they respond to a client service enabled services, which reflect a

are affiliated with KPMG International environment by leveraging the shared knowledge of global and local

Cooperative (“KPMG International”), a resources of a global network of firms, industries and our experience of the

Swiss entity. Each KPMG firm is a providing detailed knowledge of local Indian business environment.

legally distinct and separate entity and laws, regulations, markets and

describes itself as such. competition. We provide services to

over 2,000 international and national

clients, in India. KPMG has offices in

India in Mumbai, Delhi, Bangalore,

Chennai, Hyderabad, Kolkata, Pune

and Kochi.

ABOUT KPMG IN INDIA

21

Oil and Gas

Overview 2010

ENERGY AND NATURAL RESOURCES

kpmg.com/in

The information contained herein is of a general nature and is not intended to address the circumstances of any particular

individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that

such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one

should act on such information without appropriate professional advice after a thorough examination of the particular

situation.

© 2010 KPMG, an Indian Partnership and a member

firm of the KPMG network of independent member

firms affiliated with KPMG International Cooperative

(“KPMG International”), a Swiss entity. All rights

reserved.

KPMG and the KPMG logo are registered trademarks

of KPMG International Cooperative (“KPMG

International”), a Swiss entity.

Printed in India

Contact us

Head - Markets

T: +91 22 3090 2320

E: vutamsingh@kpmg.com

Head - Energy and Natural Resources

T: +91 22 3090 1740

E: arvindmahajan@kpmg.com

Vikram Utamsingh

Arvind Mahajan

www.kpmg.com/in