Union Oil Budget Booklet

Publication release: Senior Management Meet 1 - 2 March 2011 organized by

Between the linesImplications of the Union Budget 2011 on Oil & Gas Industry

www.pwc.com/india

India Union Budget 2011: Implication on Oil & Gas Industry 3

Contents

India Union Budget 2011 perspective 4

Economic survey 2010-11 6

Analysis of Union Budget 2011-12 12

Major pre-budget expectation of oil & gas industry 18

Significant policy changes and initiatives in oil & gas industry 26

Commodity balance of petroleum and petroleum products 30

India Union Budget 2011 Perspective


The Union Budget for 2011-12 was presented against a challenging macroeconomic environment with the need to balance several conflicting objectives like tackling inflation without impairing growth and emphasizing social inclusion at a time when fiscal consolidation is of paramount importance. Reviving investor confidence and market sentiment, badly hurt because of a series of perceived governance and policy issues was also high on the expectations list. The budget, however, was devoid of any major announcements.

Oil & gas industry provides largest contribution to the exchequer, and remains the focus of state and central governments for collection of taxes. The sector also receives attention of the Government owing to the drive to achieve energy security. Industry always looks forward to Union Budget to remove any anomalies in taxation and policy.

The Economic Survey 2011 projects growth in production of crude oil by 12.67 per cent in 2010-11, whereas that in gas production by nearly the same 12.80 per cent. These were caused primarily by the Barmer field discovered six years back and KG D6 block eight years. These blocks were awarded years before they were discovered. This illustrates the long gestation of E&P assets for commercialisation, let alone the uncertainty of discoveries. The sector has a challenge at hand of rising from the low investor response in the eighth round of awards under NELP and attracting investments to overcome energy security challenges.

Investors appeared to have considered high prices of crude oil an important reason to invest during the Seventh round under NELP. The high prices are back again in 2011 after having dropped substantially during economic meltdown, with an expectation that now in Ninth round of NELP, investors interest will be

on rise. Budget 2011 has proposed to remove ambiguity in tax provisions, albeit against the interests of investors, by completely withdrawing the tax breaks for crude oil let alone for gas. Additionally, new provisions relating to tax deduction at source would make E&P service providers look away from India. Consequently, E&P companies are expected to find services costly and scarce. Factors in the control of the Government of fiscal incentives have gone against the interest of investors, but those not in the control like crude oil prices have gone favourable. The message to investors seems to be that the Government will drive fiscal consolidation agenda, riding on the conducive market environment. Time will prove if this works. If it does not, energy planners have a task at hand; challenged with necessity of securitising oil and gas supply being the key contributor to primary energy for decades to come, they will have to face the reality of E&P investment regime continuing to lose sheen.

In October 2010, PwC as knowledge partner with PetroFed published “View from Top”, a report capturing results of survey undertaken of views of senior executives of oil companies operating in India. The results were revealing in many respects and most importantly, an overwhelming 90 per cent of the industry respondents believe that Government policies are the most important driver for India achieving energy equilibrium in the long run. An equal number believe that India’s hydrocarbon sector will have the maximum impetus in the next two decades. Around 80 per cent of the respondents feel that Government policies will increasingly favour investment in hydrocarbon development in India.

Going by the pre-budget expectations of the oil & gas and associated industry, and the views expressed in the Survey, the Budget 2011 may tend to suggest that the industry aligns the thinking with the structural reforms the Government is aiming at and take the challenges in stride.

From the economic stand point, a major announcement of the government was that it would gradually move towards direct transfer of cash subsidies on LPG and kerosene to people living below the poverty line. Consequently, this will reduce under-recoveries for oil marketing companies. The government has provided for Rs 237 billion as its share in under-recoveries for 2011-12; significantly lower than the revised estimates of Rs 386 billion for 2010-11. With the oil prices rising, under-recoveries would increase significantly and the government appears to be prepared to pass on the cost to consumers, lest it intends to increase its contribution later.

The gas sector made significant progress in the year 2010-11 on commercialisation of domestic reserves, selection of licensees for large gas pipelines and city gas distribution areas. The Union Budget did not specifically address to the gas sector, probably leaving the sector to investors to assess on its merit and develop.

In summary, the oil & gas sector did not receive any incentives through the Union Budget 2011 provisions but leaves it to the next few months to the assess impact of withdrawal of concessions to E&P sector and reduction in subsidy provisions.

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Economic Survey 2010-11


Economic Division of Ministry of Finance, Government of India released Economic Survey 2010-11 on February 25, 2011. An additional chapter for services has been added this year. The following excerpts of the Survey provide analysis of the oil & gas sector and put in perspective the role and performance of the sector.

State of economy

Indian economy has emerged with remarkable rapidity form the slowdown caused by the global financial crisis of 2007-09. With growth in 2009-10 now estimated at 8.0 per cent by the quick estimates released on 31 January 2011 and 8.6 per cent in 2010-11 as per the advance Estimates of the central statistics office released on 7 February 2011-11.

Growth in the industrial sector as per the IIP was buoyant during the first two quarters of the current financial year. The manufacturing sector, in particular, showed a remarkable robustness, growing at rate of 12.6 per cent and 9.7 per cent respectively during these quarters. For the current financial year (April-November), growth in the IIP was placed at 9.5 per cent as against the 7.4 per cent that obtained in the corresponding period last year.

The growth in agriculture marginally recovered to 0.4 per cent primarily due to good Rabi crop.

The service sector has played a dominant role in the Indian economy with a 57.3 per cent share in the GDP. Total services including construction grew by 9.4 per cent; total services excluding construction grew by 9.6 per cent in 2010-11.

Commodity price and inflation

This has been a classic year of economic recovery for India. The economy remained on the path of rapid resurgence which began in 2009-10 and has virtually returned to the high growth path that it had achieved during 2005-08, before the global financial crisis and economic meltdown.

This has been a difficult year in terms of inflation, even though the overall trend of inflation has been downwards. Inflation

peaked around March and April 2010 and has since been on a downward trend despite a disturbing turnaround in December 2010. Inflation in India is measured by a wholesale price index (WPI) and four different consumer price indices (CPIs) for various categories of consumers. Interestingly, measured by all five price indices, it was in single digits from October 2010. It can be argued that the sharp hike in the price of vegetables seen during December 2010 and January 2011, especially of onions, reveals defects in our food production and marketing systems. What came to light during this period was the great difference in prices for the same product at the farm gate and in city retail outlet.

In the current financial year, the average inflation (April–December 2010) of 9.4 per cent was also much higher than the decadal rate 5.3 per cent. The ten-year average inflation in fuel was around 8.9 per cent. The major portion of that was contributed by the high inflation of 2000-01.

The year 2009-10 was an abnormal one due to global slowdown and unfavorable monsoon. Notwithstanding, the average inflation was 3.6 per cent backed by negative inflation in fuel. In the current financial year (2010-11), overall average inflation from April-December 2010 at 9.4 per cent, is the highest recorded in the last ten years.

External trade

Indian merchandise imports, also affected by global recession, fell to US$ 288.4 billion with a negative growth on -5.0 per cent in 2009-10. This was due to the fall in growth in petroleum, oil and lubricant (POL) imports by 7.0 per cent. POL import growth was low mainly due to decline in import price of the Indian crude oil import basket by 16.5 per cent despite the increase in quantity by 7.7 per cent.

International oil prices recorded unprecedented rise during 2008 and remained considerably volatile during the entire ensuing period. The price of Indian basket of crude oil which moved in tune with international oil prices was also

volatile, averaging at 83.57 per barrel during 2008-09 after reaching an unprecedented US $ 142 per barrel on 3 July 2008 before declining sharply following the global recession. The monthly movements in oil prices during 2007-08 to 2009-10(April-December) clearly reflect this volatility. Current oil prices are around US $ 95-100 per barrel with Brent crude price even crossing the US $ 100 mark in February 2011 and Indian crude oil basket reaching US $ 98.4 per barrel on 11 February 2011.

The export basket has seen major compositional changes in this decade with a 10 per centage point fall in share of manufactures, a 12.6 per centage point gain in share of petroleum crude and products, and a 3.3 per centage point fall in share of primary products. Share of petroleum crude and products increasing continuously both in 2009-10 and first half of 2010-11 to reach 16.9 per cent.

POL imports

POL exports

Net POL Imports

2005-06 47.3 66.5 41.4

2006-07 29.8 60.1 18.9

2007-08 39.8 52.5 33.7

2008-09 17.4 -3 28.7

2009-10 -7 2.3 -10.9

2010-11 (Apr.-Sep.)

29.7 66 15.1

Growth in POL trade and non-POL Imports (US $ terms)

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Fiscal Policy Development

During the current financial year (2010-11), production of crude oil is estimated at 37.96 million metric tons (MMT), which is about 12.67 per cent higher than the crude oil production of 33.69 MMT during 2009-10. The projected production of Natural Gas including Coal Bed Methane (CBM), for 2010-11is 53.59 billion cubic metres which is 12.80 per cent higher than the production of 47.51 BCM in 2009-10. The increase in natural gas production is primarily from the KG deepwater block.

Subsidies

As a proportion of the GDP, subsidies have grown from 1.4 per cent in 2004-05 to 2.3 per cent in 2008-09 (Figure 3.9). Below-the-line bonds issued in lieu of subsidies also rose to a level of 1,10,510 crore in 2008-09 (2 per cent of the GDP). This rise in subsidies owes to the elevated levels of global crude oil prices and the less than full pass through of the international prices to the domestic markets and is also reflected in fertilizer subsidies as cost of feedstock is the major cost. Following the global financial crisis, there was a brief respite; nevertheless global crude prices have started to trend up. Some of the subsidies were also not targeted properly. The Budget for 2010-11 also announced the intent of bringing all subsidy-related liabilities to fiscal accounting. It was in this context that the recent Budgets have focused on restructuring the subsidy regime in fertilizers and petroleum. As a first step, pricing of petrol (motor spirit) was liberalized and a modest hike in administered prices of kerosene and LPG (liquefied petroleum gas) was announced. The retail selling price of public distribution system (PDS) kerosene was increased by 3 per litre in Delhi with corresponding increase in the rest of the country and the price of domestic LPG was increased by 35 per cylinder (14.2 kg) in Delhi with corresponding increase in the rest of the country. FDI inflow into Petroleum industry including oil exploration in the year 2010-11 (Apr-Nov) is 542.2 million USD.

Oil and gas production

Efficient and reliable energy supplies are a precondition for accelerated growth of the Indian economy. While the energy needs of the country, especially oil and gas, are going to increase at a rapid rate in the coming decades, the indigenous energy resources are limited. Oil and gas constitute around 45 per cent of total energy consumption. At the same time, the dependence on imports of petroleum and petroleum products continues to be around 80 per cent of total oil consumption in the country. During the current financial year (2010-11), production of crude oil is estimated at 37.96 million metric tonne (MMT), which is about 12.67 per cent higher than the crude oil production of 33.69 MMT during 2009-10. The projected production for natural gas, including coal bed methane (CBM), for 2010-11 is 53.59 billion cubic metres (BCM) which is 12.80 per cent higher than the production of 47.51 BCM in 2009-10. The increase in natural gas production is primarily from the KG deepwater block.

Exploration of Domestic Oil and Gas

India has an estimated sedimentary area of 3.14 million sq. km, comprising 26 sedimentary basins. Prior to the adoption of the New Exploration Licensing Policy (NELP), only 11 per cent of India’s sedimentary basin was under exploration. Since operationalization of the NELP in 1999, the Government of India has awarded 47.3 per cent of it for exploration. So far 87 oil and gas discoveries have been made by private/joint venture (JV) companies in 26 blocks and more than 640 MMT of oil-equivalent hydrocarbon reserves have been added. As on 1 October 2010, investment made by Indian and foreign companies was of the order of US $ 14.8 billion, of which, US $ 7.5 billion was in hydrocarbon exploration and US$ 7.3 billion in development of discoveries.


Offering of NELP Blocks under NELP IX

The ninth round of NELP (NELPIX) was launched on 15 October 2010 and 34 exploration blocks including 8 deepwater, 7 shallow water, 11 on-land, and 8 Type-S on-land were offered. On-land blocks are spread over six States, namely Assam(2), Gujarat(11), Madhya Pradesh(2), Rajasthan(2), Tripura(1), and Uttar Pradesh(1).

Coal Bed Methane (CBM)

CBM is found embedded in coal seams. The CBM policy has provided a level playing field for exploration and commercial exploitation of CBM by national and international companies since the 2000. Total CBM resources in 26 blocks awarded so far are estimated at 1374 BCM. In the fourth round, the Government of India has awarded 7 CBM blocks in the States of Assam, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, and Tamil Nadu and signed 33 contracts. Commercial production of CBM in India has now become a reality with current CBM gas production at about one lakh cu. M per day. The CBM gas produced in the country is being utilized by nearby industries in and around Raniganj block in West Bengal.

Underground Coal Gasification (UCG)

The Oil and Natural Gas Commission (ONGC) has entered into an Agreement of Collaboration (AOC-MOU) with the National Mining Research Centre-Skochinsky Institute of Mining (NMRC-SIM) in Russia. In the selected Vastan mine block, seismic survey was carried out and 18 boreholes drilled for detailed UCG site characterization. Based on geological, hydrological, and geo-mechanical data analysis, Vastan in Gujarat and Hodu Sindri in Rajasthan have been found suitable for UCG stations. Pilot production of UCG at Vastan by the ONGC is expected to commence by the end of the Eleventh Five Year Plan period.

Gas Hydrate

Gas hydrate is at research and development (R&D) stage world over. A cooperation programme between the Directorate General of Hydrocarbons (DGH) and U S Geological Survey (USGS), USA for exchange of scientific knowledge and technical personnel in the field of gas hydrate and research energy is in progress. An MOU was recently signed in the area of marine gas hydrate research and technology development between the Leibniz Institute of Marine Sciences, Germany, and DGH for research on methane production from gas hydrate by carbon dioxide sequestration.

Shale Gas

Shale gas is being explored as an important new source of energy in the country. India has several shale formations which seem to hold shale gas. The shale gas formations are spread over several sedimentary basins such as Cambay, Gondwana, and KG on land and Cauvery river. The DGH has initiated steps to identify prospective areas for shale gas exploration and acquisition of additional geoscientific data. An MOU has been signed with the USA during the visit of President Obama to India in November 2010 for cooperation in the field of shale gas assessment and development.

Gas production from KG-D6 Basin

Gas production from KG-D6 began on 1 April 2009. The current gas production from the KG-D6 field is about 53 MMSCMD, of which about 45 MMSCMD is being produced from D1 and D3 fields and about 8 MMSCMD from MA field. The approved Field Development Plan of D1 and D3 envisages gas production to the tune of 80 MMSCMD from the third year of commercial production, i.e. with effect from 2012-13.

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Crude Oil Production from Rajasthan

Crude oil production by the Rajasthan Cairn Energy India Pvt. Ltd has started in block RJ-ON- 90/1 with effect from 29 August 2009 at the initial production rate of 3500 barrels per day. Current crude oil production from this block is about 1,25,000 bopd. The Government has designated Indian Oil Corporation Limited (IOC), Mangalore Refinery and Petrochemicals Ltd (MRPL), and Hindustan Petroleum Corporation Ltd (HPCL) for lifting part of the crude oil production from this block after ascertaining the capacity of receiving refineries of the nominees. The oil production from this block during 2009-10 was about 0.447 MMT and during 2010-11, up to 30 November 2010 about 3.12 MMT.

Development of Marginal Fields

Concerted efforts have been made to put new and marginal fields in production through in-house resources as well as through service contracts. The ONGC has an inventory of 165 marginal fields and 131 have either been monetized or are under various stages of development through in-house efforts. So far, 10 fields have been awarded on service contract.

Equity Oil and Gas from Abroad

In view of unfavorable demand-supply balance of hydrocarbons in India, acquiring equity oil and gas assets overseas is one of the important components of enhancing energy security. The Government is encouraging national oil companies to aggressively pursue equity oil and gas opportunities overseas. Apart from ONGC Videsh Limited (OVL) (40 projects in 15 countries), the other oil public-sector undertakings (PSUs), namely Indian Oil Corporation Limited (IOCL) (9 projects in 6 countries), Oil India Limited (OIL) (12 projects in 8 countries), Bharat Petroleum Corporation Limited (BPCL) (12 projects in 7 countries), GAIL (India) Limited (4 projects in 2 countries), and Hindustan Petroleum Corporation Limited (HPCL) (2 projects in 2 countries), have acquired

overseas exploration acreages. The total investment by oil PSUs (OVL, OIL, GAIL, IOCL, BPCL, and HPCL) overseas is more than US$ 13 billion (59,000 crore). OVL produced about 8.87 MMTOE oil and oil-equivalent gas in 2009-10 from its overseas assets in Sudan, Vietnam, Venezuela, Russia, Syria, Colombia, and Brazil. The latest acquisition in May 2010 by OVL (along with OIL and IOCL) is 11 per cent participating interest of Carabobo-1 project in the hydrocarbon rich Orinoco belt of Venezuela, with proposed investment of US$ 1.3 billion. The projected production is 400,000 bopd and the first oil is expected in 2013.

Import of Liquefied Natural Gas (LNG)

Petronet LNG Limited (PLL), promoted by ONGC, GAIL, IOCL, and BPCL, was formed to import LNG and set up an LNG regasification plant at Dahej. PLL signed a contract with RasGas, Qatar, in July 1999 for import of 7.5 million metric tonnes per annum (mmtpa) LNG for a period of 25 years. As per the contract, supply of 5 mmtpa commenced in 2004 and of the balance 2.5 mmtpa in January 2010. In addition to these term contracts, LNG is also being sourced from the spot market by PLL and Hazira LNG Private Ltd. (HLPL). During 2009-10, about 8.91 mmtpa LNG was imported. This is equivalent to about 31 million standard cubic metre per day (mmscmd) of regasified LNG (RLNG). During April-November 2010, 4.91 mmtpa of LNG has been imported. 11.44 As part of the concerted efforts to augment the country’s supply of LNG, PLL has tied up 1.44 mmtpa for its Kochi LNG terminal from Exxon Mobil from its share in the Gorgon project, Australia, for 20 years . The sale and purchase agreement (SPA) for it was executed in August 2009. In addition, GAIL and PLL are exploring the possibility of import of LNG from various potential suppliers. 11.45 In order to handle increased LNG imports, additional infrastructure is being created in the country. Capacity at PLL’s Dahej LNG terminal has been expanded to 10 mmtpa in July 2009. Dabhol LNG terminal is

expected to be commissioned this year. The terminal will, however, become fully operational only after completion of breakwater facilities in 2012. PLL is setting up an LNG terminal at Kochi which is planned to be commissioned in 2011-12.

Refining Capacity

There had been increase in domestic refinery capacity by 19.46 per cent in 2009-10 to reach 177.97 MMT from 148.97 MMT in 2008-09 and it is further expected to reach 185.40 MMT by 1 April 2011 and 238.96 MMT by the end of 2011-12. Refinery production (crude throughput) during 2009-10 was160.03 MMT (excluding Jamnagar Refinery under special economic zone [SEZ] by Reliance Industry Ltd) showing an increase of 16 per cent over 2008-09. During April-November 2010 it was 106.53 MMT.

Pipeline Network and City Gas Distribution Network

There has been substantial increase in the pipeline network in the country with current figures of 28 product pipelines of 11,037 km length and 67.2 MMT capacities. There are also 17 crude pipelines of 7,425 km and additional LPG pipelines of over 2,000 km. With increased availability of gas in the country the city gas distribution network has been enlarged to cover compressed natural gas (CNG) in 19 cities supplying gas for domestic consumers, public transport, and commercial/industrial entities. In Vision-2015, provision of pressurized natural gas (PNG) to more than 200 cities across the country is envisaged.


Rajiv Gandhi Gramin LPG Vitaran Yojana (RGGLVY)

The ‘Vision-2015’ adopted for the liquefied petroleum gas (LPG) sector, inter-alia, focuses on raising the population coverage of LPG in rural areas and areas where coverage is low. The RGGLVY for small-size LPG distribution agencies was launched on 16 October 2009. This scheme targets coverage of 75 per cent of the population by 2015 by release of 5.5 crore new LPG connections. Oil marketing companies (OMCs) have issued advertisements to set up 2329 LPG distributors in 22 States, namely Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Chattisgarh, Gujarat, Himachal Pradesh, Jharkhand, Karnataka, Madhya Pradesh, Maharashtra, Manipur, Mizoram, Meghalaya, Nagaland, Orissa, Rajasthan, Tamil Nadu, Tripura, Uttar Pradesh, West Bengal, and Pondicherry. Out of this, 75 LPG distributors have already been commissioned. Selection for the rest of the locations is in progress as per policy.

The price of administered pricing mechanism (APM) gas produced by ONGC and OIL has been increased from June 2010 to the level of US$ 4.2/mmbtu, less royalty, which is equal to the price of gas produced by NELP operators.

Free LPG Connections to BPL Rural Households

A proposal for providing one-time financial assistance to BPL households for acquiring new LPG connections are under consideration of the Government. Under the proposed scheme, the Government and Oil Marketing Companies would provide one-time assistance of 1400 for acquiring a new LPG connection to a BPL family. The scheme would cover all eligible households in the BPL list of the State Government/Union Territory. About

32-40 lakh new LPG connections are to be released annually under this scheme. The annual financial implication of the scheme is estimated to be 490 crore. The proposed budgetary support has been restricted to the extent of 50 per cent of the total funds required. The remaining 50 per cent would be partly drawn from the Corporate Social Responsibility Funds (CSRFs) of the six major oil companies, namely ONGC, IOCL, BPCL, HPCL, OIL, and GAIL and partly borne by the three oil marketing companies (OMCs) namely IOCL, HPCL, and BPCL in the ratio by each company. It is expected that the OMCs will incur Rs. 6.00 crore during the current financial year.

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Analysis of Union Budget 2011-12


Direct TaxesCorporate Tax Rates – Unchanged

No change has been proposed to the rates of corporate income tax, withholding tax, dividend distribution tax (DDT) and capital gains tax. However, the rate of surcharge however has been proposed to be reduced from 7.5% to 5% for domestic companies and from 2.5% to 2% for foreign companies.

Thus, the effective corporate tax rate and DDT would be as follow:

Minimum Alternate Tax – Increased

Minimum Alternate Tax (MAT) has been proposed to be increased from 18% to 18.5%. The effective MAT rate would increase from 19.93% to 20.00% for domestic companies and from 19% to 19.44% for foreign companies.

The period to carry forward tax credit under MAT remains unchanged at ten years.

Alternate Minimum Tax (AMT) on LLP

MAT provisions which were currently applicable only to companies have now been extended o LLPs in modified form of AMT. AMT will be applicable to LLPs at a rate of 18.5%. However, in the case of LLPs AMT will apply to the adjusted total income (as per the Income Tax provisions) rather than the adjusted book profits, as is the case for companies. AMT credit is available to an LLP for 10 years. The amendment would be effective from financial year (FY) 2011-12.

Dividends from foreign subsidiaries

Dividends received from an foreign subsidiaries (in which the Indian company holds more than 50% of the nominal value of equity share capital) are taxed at 30% plus applicable surcharge and cess (as is applicable to an Indian company).

It is proposed to tax the dividend received by domestic companies from its foreign subsidiaries for the financial year (FY) 2011-12 at the rate of 15% (effective rate is 16.22%). No deduction is to be allowed while computing this dividend income.

Tax holiday on commercial production of mineral oil

A tax holiday of seven years is allowed to undertakings engaged in the production of mineral oil.

It is proposed to insert a sunset clause providing that this tax holiday would not be available to blocks licensed under a contract awarded after March 31, 2011.

Tax holiday for the power sector under Section 80-IA extended by one year

A tax holiday of ten years in a block of fifteen years is allowed to the units which are engaged in the generation, distribution and transmission of power or which undertakes substantial renovation and modernization of existing network of transmission or distribution lines, if the unit commences operations on or before March 31, 2011. It is proposed to extend this date to March 31, 2012

MAT provisions to apply to Special Economic Zone (SEZ) Units and SEZ Developers

SEZ units and developers enjoy an exemption from MAT. It is proposed to bring developers and units within the scope of MAT effective from FY 2011-12.

DDT to apply on SEZ Developers

SEZ developers enjoy an exemption from DDT. It is proposed that SEZ developers will be liable to pay DDT on dividends declared, distributed or paid on or after June 01, 2011.

Weighted deduction for scientific research and development - increased

Any payment to a National Laboratory, a University, an Indian Institute of Technology or a specified person for specific scientific research undertaken under a programme approved by the prescribed authority, is eligible for a weighted deduction of 175%. It is proposed to increase the above-mentioned weighted deduction from 175% to 200%.

Investment linked deductions be allowed on production of fertilizer

The investment linked tax incentive is provided by way of the 100% deductibility of capital expenditure incurred (except on the acquisition of any land or goodwill or financial instrument) for certain ‘specified businesses’.

It is proposed to extend the definition of “specified business” to include the business of production of fertilizer in India in a new plant or in a newly installed capacity in an existing plant.

Income of non-residents from notified ‘Infrastructure debt funds’

The interest income received by a non-resident from notified infrastructure debt funds is proposed to be chargeable to tax at 5% (plus surcharge and cess) on a gross basis as against a tax rate of 20% applicable on interest income for non-residents. The non-residents will not be required to file the tax returns, if the appropriate tax is withheld from this interest income.

The income of these funds shall not be chargeable to tax. Nonetheless the funds would be required to file the tax returns.

Assessee Existing Rates

Proposed Rates

Domestic Company

Corporate Tax Rate

33.22% 32.45%

Dividend Distribution Tax

16.61% 16.22%

Foreign Company

Corporate Tax Rate

42.23% 42.02%

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Discouraging transactions with persons located in notified territories

In order to discourage transactions with persons located in any country/jurisdiction which does not effectively exchange information with India, certain anti-avoidance measures will be introduced with effect from June 1, 2011. These measures would enable the Government to designate any Country/jurisdiction not exchanging information with India as a ‘notified jurisdictional area’. Once a country has been so notified, transactions between any taxpayer and a party located in a notified jurisdictional area would be deemed to be a transaction between “associated enterprises” and transfer pricing regulations will apply accordingly. The following would also be implications of transacting with persons located in these jurisdictions:

• No deduction would be allowed on payments made to any financial institution unless an authorisation is issued to the income tax authorities to seek relevant information from the said financial institution.

• No deduction would be allowed for any expenditure or allowance (including depreciation) unless the taxpayer maintains the prescribed documents or provides the prescribed information to the tax authorities.

• On receipt of any sum from a person located in one of the above jurisdictional areas, the burden would be on the taxpayer to explain the source of such money in the hands of the payer i.e. the taxpayer is required to explain the source of source of such money, failing which the amount shall be deemed to be the income of the taxpayer.

• Payments chargeable to tax for persons located in notified jurisdictional areas would be liable for tax withholding at higher of the rates specified/rates in force or at the rate of 30%.

The definition of the term “person”’ for the purpose of this provision shall include a permanent establishment.


Deductions

• Any sum paid by an employer as contribution towards a notified pension scheme shall be allowed as a deduction in computing its taxable income, up to a maximum of 10% of the employee’s salary;

• Presently contributions by employee and employer to the New Pension System (NPS) are allowed as deduction upto the overall limit of INR 100,000. It is now proposed to exclude the employer’s contribution from the above limit of INR 100,000.

An investment of INR 20,000 in notified infrastructure bonds was allowed as a deduction when computing the total income in FY 2010-11. This deduction was in addition to the overall limit of INR 100,000. It is proposed to extend the said benefit to investments made in the FY 2011-2012.

Transfer Pricing

• The variation range of 5% between the arm’s length price determined through the benchmarking analysis and the price at which the international transaction had actually been undertaken between the associated enterprises, is allowed.

• The said fixed variation of +-5% is proposed to be replaced with a percentage to be prescribed by the Central Government.

• The Transfer Pricing Officer (TPO) has been empowered to determine the arm’s length price for any international transaction not referred to him by the tax officer.

Liaison Offices

In order to monitor the activities carried out by foreign companies through liaison offices, it is proposed that these companies would be required to file annual information with the tax authorities within sixty days from the end of the relevant FY.

Due date for Corporate Tax Returns

It is proposed to extend the due date for corporate tax returns involving international transactions to November 30 from the present date of September 30.

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Indirect TaxGeneral

In the Budget speech, the Finance Minister (‘FM’) renewed his resolve to accelerate the efforts towards introduction of Goods and Services Tax (GST) and indicated that significant progress has been made towards reaching a consensus between Centre and States for introduction of GST. As a step in this direction the exemption list under Central Excise has been pruned with exemption being withdrawn on 130 products. On the services side also, new taxable services have been proposed besides expanding the scope of certain existing services. Following are the major highlights flowing from the Budget speech in this regard:

• Tabling Constitutional amendment bill in the Budget session before the parliament for providing enabling powers to Centre and State to levy GST on goods and services equally;

• Preparation of draft Central Goods and Services Tax Act (‘CGST Act’) and State Goods and Services Tax Act (‘SGST Act’) in 2011;

• National Stock and Depository Limited has been chosen a technology partner for establishment of IT Infrastructure and is expected to roll out a pilot portal by June 2011; and

• Significant progress has been made towards work of GST Network (‘GSTN’). Key business processes of registration, payments and returns are in advanced stages of finalisation.

Budget 2011 has however not indicated any roadmap leading to the introduction of GST from April 2012.

Customs

Tariff

• The median rate of basic customs duty (‘BCD’) has been maintained at 10%.

• BCD rates of 2%, 2.5% and 3% are unified at the median rate of 2.5%.

• Rate of duty reduced on Petroleum Coke from 5% to 2.5%.

• There has been no change in custom duty rates of crude oil, petrol and diesel and other petroleum products. Budget 2010 imposed BCD of 5% on crude oil. The much needed industry expectation of exemption from duty on crude oil has not been addressed.

Non Tariff

• Present requirement of assessment of bill of entries by the Customs officer is replaced by self assessment thereof.

• Requirement of cash security done away with under project imports.

Cenvat

Tariff

• The median rate of excise duty has been maintained at 10%.

• There has been no change in excise duty rate for petrol and diesel and other petroleum products.

Non Tariff

• Definition of capital goods expanded to include goods used outside factory for generation of electricity for captive use within the factory;

• Definition of inputs liberalized to include all goods used in factory provided such goods have relationship with the final product. Also, CENVAT credit is not available on: – any goods used for construction

of building or civil structure; – the goods used in a guesthouse,

club, residential colony meant for personal use of employees etc.

• Availability of CENVAT credit on input services made restrictive by: – removing reference to services

used for business purposes; – disallowing CENVAT credit on

specified services for constructing buildings, civil structures and for laying foundation or making structures for supporting capital goods;


– disallowing CENVAT credit on specified employee welfare services such as outdoor catering, life and health insurance, travel benefits, etc.

• Definition of exempted services amended to include trading and services which are partly exempt subject to prescribed condition;

• Amount payable under Rule 6(3) on provision of taxable and exempted services have been reduced from 6% to 5%;

• CENVAT credit to be reversed even in case of partial write off of inputs or capital goods;

• Removal of erstwhile beneficial Rule 6(5) providing full CENVAT credit in respect of 16 golden services used for provision of both taxable and exempt services;

• The restriction under Rule 6 not applicable in case taxable services are provided without payment of service tax to SEZ unit/zone/developer;

• Service tax paid under reverse charge as per Section 66A to be eligible CENVAT credit retrospectively w.e.f. 18.4.2006.

Service Tax

• Service tax rate has been maintained at 10%.

• Service tax imposed on following new services with effect from a date to be notified: – Services by air-conditioned

restaurants having license to serve liquor; and

– Short-term accommodation in hotels/inns/clubs/guest houses etc.

• Expansion in scope of existing services, including: – Health Services; – Legal Services; – Life Insurance Services and – Business Support Services.

• Point of Taxation Rules, 2011 introduced. w.e.f. 01.04.2011 - These rules determine the point in time when the services shall be deemed to be provided. The general rule will be that the time of provision of service will be the earliest of the following dates: – Date on which service is provided

or to be provided; – Date of invoice and – Date of payment.

Consequential changes have also been made in the Service Tax Rules, 1994

• Penal provisions rationalized – The maximum penalty for delay

in filing of return has been increased from Rs 2,000/- to Rs 20,000/-. However the existing rate of penalty is being retained under Rule 7C of the Service Tax Rules, 1994

– Penalty for failure to pay tax under Section 76 is being halved. Section 76 provides for Penalty for failure to pay service tax for the amount of Rs. 200 per day for period of default or 2% of tax involved, whichever is higher. Maximum penalty reduced to 50% of the tax amount

– Maximum penalty u/s 77 for contravention of various provisions of the Act increased from Rs 5000/- to Rs 10000/-

• The rate of interest for delay in payment of taxes is being increased from 13% to 18% p.a w.e.f 1.4.2011.

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Major Pre-Budget Expectation of Oil & Gas Industry


Direct TaxUpstream

Income Tax Holiday under Section 80IB (9)

The Income tax department is adopting a narrow interpretation of the tax holiday provisions of Section 80IB (9) to say that the holiday is available only if exploration results in the striking of crude oil, and it is consequently holding that profits made on the sale of gas, where gas is struck, are not eligible for the income tax holiday.

The Union’s Finance Minister, during discussion on the Finance Bill, 2008, gave assurances that the benefit of section 80-IB (9), as finally interpreted by the courts, would be applicable to all exploration and production contracts. The Finance (No.2) Act, 2009 has inserted new clauses to clarify that the tax holiday would be available on gas produced from blocks licensed under the eighth round of bidding under New Exploration Licensing Policy (NELP) and fourth round of bidding under the Coal Bed Methane (CBM). The insertion of these clauses may suggest that gas produced from the blocks other than those awarded under NELP VIII /CBM IV are not entitled to the benefit of tax holiday.

It was therefore expected that this year budget will clarify that the benefit of tax holiday would be available on the gas produced from all the blocks awarded under NELP / CBM or in any other manner by Central or State Government.

Availability of Tax Holiday to Each Well)

As per legal pronouncements and general provisions of the Income Tax Act, 1961(Act), each well can be considered as a separate undertaking for the purpose of tax holiday under section 80IB(9). However, the Finance (No. 2) Act, 2009 has amended the provisions of Act to clarify that all blocks licensed under a single contract, which has been awarded under the New Exploration Licensing Policy or has been awarded in pursuance

of any law for the time being in force or has been awarded by the Central or a State Government in any other manner, shall be treated as a single “undertaking” for the purpose of claiming a tax holiday under section 80IB(9). This amendment has virtually overturned the already decided cases which have gone in the favour of assessee by making retrospective legal amendments to re-write the law from financial year 1999-2000, pre-judging the matters pending before courts and tribunals. These changes are detrimental to the nation’s energy security and also cause hardships to the taxpayers who have acted upon the pre-amendment provisions of the Act.

However, if at all the meaning of “undertaking” is to be defined to reflect a change in government policy in regard to the oil and gas sector, a clarification was expected that such change will operate only on a prospective basis i.e., from financial year 2009-10.

Tax Holiday to Exploration & Production(E&P) Companies to be Enhanced to Ten Years from Seven Years and Flexibility to Choose Period of Ten Years of Tax Holiday out of 15 Years

Tax holiday u/s 80-IB(9) is available to E&P companies for seven consecutive years starting from the year in which commercial production commences. The period of seven years of tax holiday is less than the tax holiday period available to companies in the infrastructure sector, such as power generation and distribution companies. Furthermore, during the initial seven years, companies have large expenditure to set off and hence the actual benefit of the tax holiday does not reach them.

Like Infrastructure, E&P Industry is also highly capital intensive with a long gestation period. Thus, it was expected that the provisions of Section 80-IB (9) would be amended to extend the period of seven years of tax holiday to ten years and to allow flexibility to E&P companies

to choose the period of a tax holiday during the initial fifteen year period of their operation. Alternatively, it was expected that Section 80-IA benefits will be extended to E&P companies engaged in the exploration and production of oil and gas.

Exemption from Minimum Alternate Tax (MAT) (Section 115JB)

The exploration and extraction of mineral oil has been given a tax holiday u/s 80-IB (9). However, this provision has been nullified to an extent by applying the provisions of MAT under Section 115 JB. These companies normally earn higher book profits in the initial years after commercial production begins, since the tax deductions in respect of exploration and drilling expenditure are granted on an accelerated basis. It was therefore expected that the business of the exploration and extraction of mineral oil will be exempted from MAT under Section 115JB of the Income Tax Act, 1961.

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Introduction of Specific Provisions in the Income Tax Act Regarding ‘Farm-in costs’

Another long pending demand of the E&P sector is the introduction of specific provisions in the Income Tax Act, 1961 regarding the treatment of ‘farm-in costs’. The tax treatment of such payments remains unclear and gives rise to disputes between the industry and the tax department. It discourages acquisitions in the E&P sector since the magnitude of tax costs are high and can result in proposed transactions becoming uneconomical. A ‘farm-in’ is a transaction unique to the E&P sector. As a result of a farm-in in an existing exploration block, the company gets a share in the licenses and rights on it which are originally granted to the company farming out of a block. Thus, it was expected that to avoid possibility of any dispute, these costs would be specifically be recognized as an intangible asset eligible for depreciation under section 32 of the Income Tax Act, 1961.

Weighted Deduction in Line with R&D Expenses to be Introduced under Section 42 of the Income Tax Act

Section 42 of the Act allows deductions in respect of capital and revenue expenditure actually incurred by the assessee in respect of drilling and exploration activities. The fact that capital expenditure is also allowed as a deduction beginning with the year of commercial production only amounts to an accelerated deduction of the expenditure incurred and does not amount to any additional deduction or incentive being granted to the assessee.

It is important that expenditure in respect of drilling and exploration activities be treated the same as R&D expenditure to encourage the E&P sector to adopt a more aggressive approach to invest in areas even where the probability of striking oil reserves is lower than in other areas. It was therefore expected that weighted deduction of 200% of the actual expenses incurred by the assessee in respect of drilling and exploration activities would be allowed to the assessee under section 42 of the Income Tax Act.

Deduction for Expenditure Incurred on Drilling and Exploration Activities by an Indian Company with an Overseas Production Block under Section 37 of the Income Tax Act

An Indian E&P company typically does not enter into Section 42 agreements with the Central Government in respect of its overseas exploration block. Thus, section 42 does not apply to such companies with respect to their overseas exploration blocks.

However, where they have already started their exploration activities, the deduction for the expenditure incurred on drilling and exploration activities in respect of the overseas blocks should be available under section 37 of the Income Tax Act, 1961. It was therefore expected that the Government of India, by way of an amendment to the Act, will clarify this matter.

Deduction for Infructuous or Abortive Exploration Expenses u/s 42

Typically the provisions of the Production Sharing Contract does not require the area to be surrendered as a prerequisite for claiming the deduction of unsuccessful exploration cost. However, under section 42 of the Income Tax Act, 1961 provides for a deduction for infructuous or abortive exploration expenses is not allowed until the surrender of the area, even though the expenses are already charged off in the books of accounts as per the company’s accounting practices. As a result of the requirement to surrender the area prior to the beginning of commercial production, the assessee is not able to avail the deduction, from taxable income, of expenses on account of abortive exploration in the year when expenditure is incurred. It was expected that the requirement to ‘surrender’ the area will be deleted from Section 42(1)(a) and that deduction will be allowed from the year in which the area is abandoned as abortive.

Midstream

Grant of Profit Linked Tax Holiday to Cross Country Pipelines for Crude and Petroleum Products

The Finance (No.2) Act, 2009 has withdrawn the profit linked tax holiday provided to undertakings engaged in laying and operating natural gas distribution networks including pipelines and storage facilities and provided 100% deduction for any expenditure of capital nature incurred, wholly and exclusively for the purpose of such business.

Such incentive does not provide any real benefit but creates only a timing difference as the capital expenditure incurred wholly and exclusively for the purpose of business is anyways allowed over a number of years. The profit based tax holiday available to such companies under section 80-IA was however a real benefit.

Since, pipelines have several distinct advantages over other modes of transport in terms of safety, eco-friendliness, lower product losses etc, it was therefore expected that the benefit of tax holiday under section 80-IA will be returned to the crude and petroleum product pipelines.

Investment linked incentive under section 35AD

The benefits of investment-linked tax holiday are provided only to the “cross country” natural gas, crude or petroleum pipeline network for distribution, including storage facilities being an integral part of such network.

Since pipelines have several distinct advantages over other modes of transport, it was expected that this benefit will be extended to intra-city and intra-state gas distribution network used for transporting natural gas and it was expected that the Government of India, by way of an amendment to the Act, will define the term “cross country” in relation to the gas distribution network.


Downstream

Extending depreciation benefits available to Pollution Control Equipment to Capital Investments made by Refineries for producing Fuels in accordance with stringent emission norms

Refineries are making substantial capital investments to produce fuels under stringent emission standards in order to reduce pollution. It was expected that such capital investment, being a pollution control measure, will be given the depreciation benefits available to other pollution control equipment.

Extending the sunset clause beyond 31 March 2012 for tax holiday under Section 80IB(9) for undertakings engaged in refining of mineral oil

The seven year tax holiday is available to undertaking engaged in refining of mineral oil, which begins such refining on or after October 1, 1998, but not later than March 31, 2012. Thus, refineries which will begin the refining of mineral oil after March 31, 2012 are not eligible for tax holiday.

It was expected that the sunset clause will be extended so that the refineries which will begin the refining of mineral oil after March 31, 2012 will also be eligible for tax holiday.

Service Providers

Clarification for applicability of presumptive tax regime to O&G Service Providers

Section 44BB provides for presumptive taxation of income earned by a non-resident engaged in business of providing services or facilities in connection with, of supplying plant and machinery on hire used or to be used, in the prospecting for, or extraction or production of, mineral oil. Such income is taxable at 10% of the gross sum paid or payable to such non-resident.

Section 44DA separately provides that fee for technical services (FTS) or royalty income earned by a non-resident having a Permanent Establishment (PE) in India shall be taxable on net income basis at 40%.

The definition of FTS as provided under the Act categorically excludes the consideration for any mining or like project. Instruction No. 1862 issued by the Central Board of Direct Taxes on October 22, 1990 provides that the expression ‘mining project’ or ‘like project’ would cover the services rendered for exploration or exploitation of oil and natural gas. Thus, consideration for such services will not be treated as FTS under section 9(1)(vii) and payment will be taxed under section 44BB of the Act.

The scheme of presumptive taxation under Section 44BB has been amended by Finance Act 2010 to exclude the income referred to in section 44DA (i.e. royalty or fees for technical services (FTS)) earned

by a non-resident having a PE in India. A corresponding amendment has also been made in section 44DA to provide that Section 44BB shall not apply in respect of the income referred to in section 44DA of the Act.

Considering that the services rendered by the oil and gas service providers do not fall within the definition of FTS as provided under Section 9(1)(vii) of the Act, the amendment shall result in unnecessary litigation with the tax authorities.

The intention behind the presumptive taxation scheme was to simplify the determination of income of the non-resident, providing services or facilities to oil and gas sector. This rationale still holds good.

Accordingly, a clarification was expected to the effect that the instruction # 1862 will continue to apply to all services rendered in connection with the prospecting for, or extraction or production of, mineral oil so that the benefit of presumptive taxation be continued to be made available to such service providers.

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Indirect TaxCustoms

Exemption from customs duty to crude oil

In Budget 2010, customs duty @5% on crude oil was imposed. This was done hoping that the prices of crude oil will fall. However, the average price of crude oil which was around $82 per barrel in 2008-09 has gone up substantially in the current year and is further expected to increase in 2011-12. In this scenario, impact of customs duty on crude oil will further escalate the cost of crude oil. Most other countries do not levy any duty on crude oil to keep prices of petroleum products low. Removal of duty on crude oil would reduce under recovery on petroleum products. By abolition of duty on crude oil, Government would have lesser subsidies to meet.

Removal of National Calamity Contingent Duty on Crude Oil levied at Rs.50/MT

The National Calamity Contingent Duty (NCCD) of Rs.50 per metric tonne was imposed on domestic and imported crude oil, amongst various other goods, in the Union Budget for 2003-04 in order to augment the fund available with the Government to provide support to the relief work in the areas affected by natural calamity. This results in stranded cost to the refining sector and is therefore expected to be abolished.

Excise

CENVAT credit on cement and steel articles

In the Union Budget for the year 2009-10, the definition of “inputs” as contained under the Cenvat Credit Rules, 2004 (“CCR”) was amended by inserting an explanation to exclude cement, angles, channels, CTD bar, TMT bar, and other items used for construction of Factory Shed, Building or laying foundation or making of structures for support of capital goods, from the definition of ‘inputs’.

The purpose of Cenvat scheme is to give credit of input tax so as to remove the cascading effect of taxes. This is more pertinent, given that now we are moving towards GST regime. In such a scenario, restricting input tax credit on certain items such as steel and cement defeats the purpose and goes against the grain and principle of Cenvat Credit Scheme. In light of this, the said explanation inserted in the definition of inputs should be deleted.

Liability of interest where Cenvat credit has been wrongly availed but reversed by assessee before utilization

The CBEC vide Circular No 897/2009 dated September 3, 2009 has clarified that interest shall be recoverable in cases where CENVAT credit has been wrongly taken even if it has not been utilized. Basis this department is issuing notices demanding interest on CENVAT credit wrongly availed even though unutilized.

As wrong availment of CENVAT credit by itself does not create any liability for payment of excise duty, interest should be leviable only when the wrongly availed CENVAT credit has been utilised for payment of the duty. Consequently, Rule 14 of the CENVAT Credit Rules, 2004 should be amended to clearly distinguish that interest should be payable on wrongful availment and utilization of CENVAT credit and not only on wrong availment of CENVAT credit.

Sales Tax / Value Added Tax(VAT)

VAT on Petroleum Products

Petroleum products are being subject to single point levy of tax on sale at a very high rate (20 per cent to 35 per cent) even post the implementation of VAT in India. Tax is being levied at first point in most States and no VAT credit is available on the sale/purchase of petroleum products leading to distortion in the tax credit chain.

In view of the intention of the Government to implement Goods and Services Tax (GST) in the year 2011-2012, it is important that the Government, as a step towards GST, brings all items under the ambit of the VAT regime. It is, therefore, recommended, that petrol and petroleum products are brought under the VAT regime and taxed at multipoint, with credits available for the tax paid on purchase thereof. Considering that these are items of mass consumption, the Government may consider levying VAT on these products at the revenue neutral rate of 12.5 per cent. However, if this is not feasible due to revenue constraints, the Finance Ministry should make a request to the Empowered Committee to ensure that the variation in revenue neutral rate (i.e. 12.5 per cent and the VAT rates in case of diesel and petrol should not exceed 3 per cent to 4 per cent.

‘Declared Goods’ Status to Natural Gas and LNG under the Central Sales Tax Act, 1956

Post introduction of VAT in India, natural gas have been classified at the revenue neutral rate of 12.5 per cent under most State VAT laws. Some States have also kept natural gas out of the VAT regime and are levying VAT at a high rate of 20 per cent.

Natural gas is an important source of energy for fertilizer, petrochemicals, power and several other industries. Importance of natural gas is likely to increase in the coming years due to rise in domestic use in the coming years. However, the high and multiple point sales tax structure on natural gas, without input credits is adversely affecting the consumers, the trade in natural gas and the Indian economy as a whole.

Therefore, suitable relief in sales tax is urgently required, not only to ensure that cost of gas to the end consumer is kept low but to also facilitate development of associated infrastructure.

It may be mentioned that natural gas is a primary energy source. As of now, the other primary energy sources like coal and crude oil are declared as ‘goods of special importance in Inter-State trade or commence u/s 14 of the Central Sales Tax Act, 1956. Natural gas, therefore, notwithstanding its environmentally benign nature, becomes costlier and non-competitive with such other fuels. In order to provide a level playing field amongst different primary energy sources, natural gas including R- LNG should be accorded the “Declared Goods” status under the Central Sales Tax Act, 1956.

The tax rates on natural gas at par with coal and crude oil was expected, particularly since natural gas is used in production of goods used by the common-man, like electricity, fertilizers, auto and domestic fuels. This will help in rational and economic choice of fuels by the consumers.

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Service Tax

Exemption from Service Tax on Services Consumed by E&P Companies in relation to Exploration and Productions Activities

There has been a recurring demand of the Oil and Gas sector to eliminate service tax on services consumed by E&P companies. However, service tax has been gradually made applicable to more and more services used in the upstream sector thereby resulting in significant increase in the costs of carrying out various E&P activities. The beginning was made in the year 2004 when survey and exploration of mineral, oil and gas service was introduced. Thereafter, in 2005, the taxable category of site formation and clearance, excavation and earthmoving and demolition services was brought within the ambit of service tax. And with effect from June 1, 2007, the Government brought ‘Mining Services’ i.e. services provided in relation to mining of mineral, oil or gas, under the service tax net. The

position even worsened in view of extension of provisions of service tax to the installations, structures and vessels in the continental shelf of India and the exclusive economic zones of India in 2009.

As a result, service tax now comprehensively covers the upstream sector. Most of these E&P services are generally outsourced by E&P companies

to third party service providers. Further, there is no output CENVAT/service tax liability with regard to the crude oil and natural gas production activities of the upstream sector. This has resulted in break in the credit chain which eventually results in substantial increase in operating costs for exploration companies. Hence, service tax paid on procurement of taxable services by E&P companies end up as a sticking cost.

In view of the above, it is expected that the Central Government, in line with other concessions would exempt services consumed by the E&P sector.

Alternatively, the possibility of refund of the service tax paid on input services consumed by the E&P sector should also be considered. However, it is recognized that the refund mechanism is not a convenient procedure.

Amendment in Rule 6(6) of CCR to extend the benefit to exempt services in addition to exempt goods

Sub rule 6 of Rule 6 provides that a manufacturer of goods need not reverse the CENVAT credit where the goods are cleared to specified categories like SEZ, EOU, etc. Similar benefit should be extended to services provided to these specified categories so that there is no requirement to reverse the credit in case of services provided to these units.

Goods and Services Tax(GST)

Inclusion of Petroleum Products in GST regime

The draft proposal circulated by the Ministry of Finance to the State Government proposes to keep petroleum products such as crude oil, MS, HSD, ATD and natural gas permanently outside GST through a constitutional amendment. It is proposed that the taxation of these goods would continue as provided under the existing scheme of taxation. This would lead to inefficiencies and would lead to tax cascading.

Several countries like Australia, Canada, Sri Lanka, Singapore and Brazil have included petroleum products in GST. The

13th Finance Commission has recommended inclusion of petroleum products under GST.

Petroleum products should not be kept out of GST in the proposed constitutional amendment since any change in future to bring the same under GST will need the Constitution to be again amended. Further, the partial implementation of GST for some petroleum products will push up costs for the sector as States would levy service tax under the new regime and input credit will not be available by the sector

Thus, to avoid the breakage in the tax chain and overall growth of Oil and Gas Sector, it is suggested that all the petroleum products should be brought into GST regime and if they have to be excluded from the GST at this stage, it may be done through an appropriate provision in the GST legislation instead of excluding them through the constitutional amendment bill.

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Significant Policy Changes andInitiatives in Oil & Gas Industry


Significant policy changes relating to the oil & gas industry were affected by the Government of India in the Financial Year 2010-11. Cited below are also some key initiatives and developments amongst them.

Upstream

Domestic Production

The year saw consolidation and increase in production of crude oil and natural gas after two major discoveries were put on production last year which included gas production from RIL’s KG D-6 field and crude oil production from the Cairn’s Barmer field.

Crude oil production which was stagnating around 33 MMT is expected to be higher by over 10 per cent. Natural gas production, which used to be around 80 MMSCMD, is targeted to increase to about 140 MMSCMD.

NELP

In order to intensify efforts of exploration of hydrocarbon in the country as many as 31 exploration blocks were awarded under the Eighth Round of New Exploration Licensing Policy (NELP VIII) with the signing of Production Sharing Contracts (PSC) on June 30, 2010. Similarly, 7 blocks were awarded for exploitation and production of coal bed methane in July 2010. Buoyed by the success of NELP rounds with 87 discoveries so far, Government has further offered 34 blocks on October 15, 2010 under NELP IX.

Rig holiday in deepwater blocks

The Government approved the grant of drilling moratorium of three (03) years to all deepwater block Production Sharing Contracts (PSCs) signed under various rounds of exploration till the NELP V where drilling commitments are pending as on January 01, 2009. The main objective of the drilling moratorium dispensation was to enable Contractors to meet the drilling commitments under various PSCs, which have been adversely

affected on account of world-wide shortage in availability of deepwater rigs since 2007 due to the then prevailing high crude oil prices.

National Data Repository (NDR)

Action has been initiated to establish the National Data Repository (NDR), which is a pre-requisite for formulation of Open Acreage Licensing Policy (OALP). The Government has not yet notified OALP.

Oil diplomacy in higher gear

In order to achieve the objective of oil security, the Ministry of Petroleum and Natural Gas (MoPNG) engaged several countries/fora in bilateral/multi-lateral talks. These include attending/holding international meets like International Energy Forum meet at Cancun, Mexico in March, 2010, Petrotech 2010 in Delhi, 4th ASEAN Energy Ministers Summit at Dalat, Vietnam. Indian delegations also had bilateral talks with various other oil rich countries including Angola, Canada Iran, Mexico, Nigeria, Russia, Sudan, Turkmenistan, Venezuela, etc.

Major successes in the oil diplomacy include signing of an agreement between national oil company of Venezuela (PDVSA) and a consortium of Indian oil PSUs comprising ONGC Videsh Ltd. (OVL), IOC and Oil India Ltd. (OIL) ONGC Videsh Ltd (OVL) for development of Project 1 in oil rich Carabobo basin in the month of May 2010. The Ministry also signed inter-governmental agreements with US, Russia and Angola for enhancing cooperation in the oil and gas sector.

Natural Gas

Natural Gas Infrastructure in India

The Government notified Section 16 of the Petroleum and Natural Gas Regulatory Board Act, 2006. Section 16 empowers the Petroleum and Natural Gas Regulatory Board to authorize companies to lay, build, operate and expand natural gas pipelines and City Gas Distribution networks in India.

Bids were invited by PNGRB for three (03) pipelines viz Mallavaram-Bhilwara Pipeline, Mehsana-Bathinda Pipeline and Bathinda-Srinagar Pipeline. The GSPC-IOC-BPCL-HPCL consortium emerged as winner for all the three pipelines. PNGRB is yet to issue formal authorisation in absence of the Supreme Court’s decision on its authority to do so. PNGRB has now invited bids for the Surat-Pardip Pipeline project.

The City Gas Distribution projects to supply Piped Natural Gas (PNG) and Compressed Natural Gas (CNG) are also being encouraged with an aim to extend the coverage to more than 200 cities from current 19 cities. PNGRB concluded the Third Round of bidding for eight (08) cities/Geographical Areas on February 18, 2010. The Fourth Round is under progress with another eight (08) cities/ Geographical Areas being offered by PNGRB.

Augmenting supply of natural gas

The supply of natural gas, a preferred fuel and feedstock for industries, has been augmented substantially. Besides domestic production, the options of trans-border imports were pursued. In order to augment long-term supply of natural gas in the country an inter-governmental agreement was signed at Ashgabat for implementation of Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline in the month of December 2010. The Iran-Pakistan-India (IPI) pipeline project is also under consideration/discussion for sourcing natural gas.

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Revision of APM price of natural gas

The price of gas under the Administered Price Mechanism (APM) was increased from the present level of INR 3,200/MSCM to INR 6,818/MSCM. For customers in the North-East, 40 per cent of the price would be provided as subsidy by Government. The price of natural gas produced ONGC and Oil India Ltd. (OIL) from their nomination blocks is sold at Administered Price Mechanism (APM) price. This price was last revised in the year 2005.

Shale Gas

A Memorandum of Understanding (MoU) on Shale Gas resources between India and USA was signed during the India visit of the President of America. Main objectives of the MoU include Shale Gas resource assessment in India, technical studies to commence on Shale Gas exploration in India and training of Indian personnel in the area of Shale Gas.

Government has initiated actions to formulate a policy on Shale Gas. Detailed studies are being taken up to identify the prospective basins/areas and estimation of Shale Gas resources in the country. As a part of R&D project, a shale gas well in Raniganj basin (RNSG-I) has been spudded by ONGC and drilling is in progress.

Downstream

Introduction of BS-IV/III petrol and diesel

Bharat Stage-IV (BS-IV) petrol and diesel were mandated in 13 major cities and Bharat Stage (BS-III) petrol and diesel in the entire country. Whereas introduction of BS–IV petrol and diesel was completed on single day i.e. on April 01, 2010, in 13 major cities, the supply of BS-III petrol and diesel was fully implemented by September 22, 2010 in the rest of the country ahead of the deadline of October 01, 2010. All the public sector oil companies invested an amount of about INR 32,000 crore in the fuel upgradation projects to achieve this milestone.

Maintaining surplus refining capacity

The refining capacity in the country has been augmented to 186 MMTPA, which is well above the annual demand of about 138 MMTPA. Export of petroleum products (POL) is the single largest (17.6 per cent) merchandise export from India. The new refineries at Bhatinda, Paradip and Bina would further augment the domestic refinery capacity making India as major refinery hub is South Asia.

LPG to rural households-Dealer selection made transparent

To provide clean cooking fuel in rural areas and to achieve 75 per cent population coverage, with domestic LPG, Rajeev Gandhi Rural LPG Vitrak Yojna was formally launched at Laxmangarh, Rajasthan in March 2010 for setting up small size LPG Distribution agencies in rural areas. To mark transparency in distributor selection, draw of lots held to select the distributors under the scheme. The Oil Marketing Companies (OMCs) plan to open LPG agencies in 2,239 locations under this scheme, 49 RGGLVs have already been commissioned. This will greatly improve the cooking conditions in the kitchens of rural house-holds. The scheme will also provide new employment opportunities for the rural population leading to overall economic prosperity.

The Ministry of P&NG has also approved a more transparent selection procedure through draw of lots for all the LPG Distributors in the country.

Initiatives for better services & delivery of right quality and quantity

The Government introduced an innovative scheme for LPG consumers to be able to take delivery of the cylinders as per their desired time. The scheme has been launched in major cities initially including Delhi and surrounding towns and is being expanded to other cities. MoPNG also signed a MoU on July 30, 2010 with UIDAI with a view to better targeting of subsidized products like LPG and kerosene and avoid diversion of the products as well as improve customer services in the country.

Equitable burden-sharing marks pricing reforms

Keeping in view India’s high dependence on crude oil imports, the volatile crude oil prices and also the recommendations of a High Powered Kirit Parikh Committee, the Empowered Group of Ministers (EGOM) decided to deregulate petrol prices in June 2010. An in-principle decision was taken for de-regulation of diesel prices along with marginal hikes in LPG and SKO prices. The Government and PSUs continued to shoulder the major part of the burden of higher under-recoveries during 2010-11, estimated around INR 70,000 crore against about INR 46,000 crore in 2009-10.

Promoting Ethanol blending with petrol

The Ethanol Blended Petrol (EBP) programme earlier launched by the Government could not sustain owing to non-availability of ethanol in required quantity and other state specific issues. Later, to give fillip to the programme, Government gave fresh relook and decided on August 16, 2010 to implement the EBP programme to the extent of the ethanol made available by the domestic ethanol producers at the ex-factory declared price decided by the Government.


As per the Government decision, after ascertaining the actual availability of ethanol in the country, per centage of blend from 0-10 per cent would be recommended area-wise by the working group of officers constituted for the purpose. Government fixed provisional price of ethanol at INR 27 per litre. The programme was re-launched in November, 2010 after fresh tenders issued by the OMCs for sourcing ethanol.

General

Supreme Court ruling on KG D-6 Gas

In a major development during the year the Hon’ble Supreme Court in May, 2010 upheld Government’s decisions and jurisdiction in respect of the pricing and allocation of the natural gas discovered in KG D-6 field. The Supreme Court ruled that PSC is supreme and the natural resources belong to the Government. The decision vindicated the position taken by the government and allocations made by the EGOM constituted by the Government for the purpose.

Disinvestment

The Government had approved divestment of 10 per cent of the shares held by the President of India in Engineers India Limited (EIL). A total of 33,693,660 equity shares of INR 5 each were on offer in the ‘Further Public Offer’ (FPO).

The response to the FPO was overwhelming. In the category of Qualified Institutional Buyers (QIBs), the issue was oversubscribed by 23.4 times, in respect of Non-Institutional Buyers (NIBs), it was oversubscribed 5.9 times and in case of retail buyers, it was oversubscribed by 3 times. Overall the issue was oversubscribed by 13.4 times.

Change of guard

Shri S. Jaipal Reddy assumed the charge as the Minister of Petroleum and Natural Gas. He was earlier Minister of Urban Development in the present Government. The charge of Minister of State of Petroleum and Natural Gas was assumed by Shri R P N Singh.

Shri A.K. Hazarika, Director (Onshore), ONGC, has been entrusted the additional charge of the post of Chairman and Managing Director, ONGC on an ad-hoc basis for a period of three months with effect from February 01, 2011. Shri S.V. Narsimhan, Director (Finance) IOCL has been entrusted the additional charge of the post o f Chairman, IOCL on an ad-hoc basis for a period of three months with effect from February 01, 2011.

30 PwC

Commodity Balance of Petroleum & Petroleum Products


Item 1980-81 1990-91 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-102010-11 (Apr.- Nov.)

1 2 3 5 6 7 8 9 10 11 12 13

I. Crude Oil

1 Refinery Throughput 25.8 51.8 112.6 121.8 127.4 130.1 146.6 156.1 160.8 160.0 106.5

2 Domestic Production 10.5 33.0 33.0 33.4 34.0 32.2 34.0 34.1 33.5 33.7 24.8

(a) On-shore 5.5 11.8 11.5 11.5 11.6 11.4 11.3 11.2 11.3 11.8 10.6

(b) Off-shore 5.0 21.2 21.5 21.9 22.4 20.8 22.7 22.9 22.2 21.9 14.2

3 Imports 16.2 20.7 82.0 90.4 95.9 99.4 111.5 121.7 132.8 153.3 101.5

4 Exports — — — — — — — — — — —

5 Net Imports ( 3-4) 16.2 20.7 82.0 90.4 95.9 99.4 111.5 121.7 132.8 153.3 101.5

II. Petroleum Products

1Domestic Consumption @ of which

30.9 55.0 104.1 107.8 111.6 113.2 120.7 128.9 133.4 138.2 92.4

(a) Naphtha 2.3 3.4 12.0 11.9 14.0 12.2 13.9 13.3 13.9 10.2 7.2

(b) Kerosene 4.2 8.4 10.4 10.2 9.4 9.5 9.5 9.4 9.3 9.3 6

(c) High Speed Diesel Oil 10.3 21.1 36.6 37.1 39.7 40.2 42.9 47.7 51.7 56.3 39.1

(d) Fuel Oils 7.5 9.0 12.7 12.9 13.5 12.8 12.6 12.7 12.4 11.6 7.3

2Domestic Production $ of which

24.1 48.6 104.1 113.5 116.6 119.8 135.3 144.9 150.5 149.7 107.7

(a) Naphtha 2.1 4.9 9.7 11.3 14.1 14.5 16.7 16.4 14.8 14.8 10.7

(b) Kerosene 2.4 5.5 10.0 10.2 9.3 9.1 8.5 7.8 8.2 8.5 4.9

(c) High Speed Diesel Oil 7.4 17.2 40.2 43.3 45.9 47.6 53.5 58.4 62.9 61.1 44

(d) Fuel Oils 6.1 9.4 12.2 13.4 15.0 14.3 15.7 15.8 17.7 17.5 12.86

3 Imports 7.3 8.7 7.2 8.0 8.8 13.4 17.7 22.5 18.5 14.7 11.5

4 Exports Neg. 2.7 10.2 14.6 18.2 23.5 33.6 40.8 38.9 46.0 21.7

5 Net Imports ( 3-4) 7.3 6.0 -3.0 -6.6 -9.4 -10.1 -15.9 -18.3 -20.4 -31.3 -10.2

(Million Tonnes)

Source: Ministry of Petroleum & Natural Gas

@ Excluding refinery fuel consumption, including imports by private parties

$ Excludes LPG production from fractionators

Neg Negligible

32 PwC

Item Unit 2007-08 2008-09 2009-10

Reserves (Balance Recoverable)i Crude oil MT 725 770 775 -

ii Natural gas BCM 1055 1050 1074 -

Productioni Crude oil MT 34.117 33.5 33.7 24.8

ii Petroleum products MT 144.93 150.5 149.7 107.7

Consumptioni Crude oil MT 155.8 166.3 187 126.3

ii Petroleum products MT 128.95 133.4 138.2 92.4

Refinery installed capacity MT 132.47 148.97 177.97 185.4

Refinery Production (Throughput)

i Public sector MT 112.54 112.22 93.4 74.14

ii Private sector MT 43.56 48.55 39.855 32.38

Total MT 156.103 160.8 133.255 106.52

Natural Gasi Gross production BCM 32.402 32.85 38.486 35.291

ii Utilization BCM 31.478 31.77 33.67 31.228

Source: 1. Ministry of petroleum and Natural Gas 2. PPAC 3. Economic survey 2009-10


Abbreviations

AED - Additional Excise Duty

APM - Administered Price Mechanism

ATF - Aviation Turbine Fuel

bbl - A Barrel

BCM - Billion Cubic Meters

BE - Budget Estimate

BED - Basic Excise Duty

CBM - Coal Bed Methane

CCR - CENVAT Credit Rules

CENVAT - Central Value Added Tax

CTD Bar - Cold Twisted Bar

CNG - Compressed Natural Gas

E&P - Exploration and Production

EOU - Export Oriented Unit

FC - Finance Commission

FCI - Fertilizer Corporation of India

FRBM Act - Fiscal Responsibility and Budget Management Act, 2003

GAIL - Gas Authority of India Limited

GDP - Gross Domestic Product

GoI - Government of India

GSPA - Gas Sale Purchase Agreement

GST - Goods and Service Tax

HSD - High Speed Diesel

EGoM - Empowered Group of Ministers

HSE - Health Safety Environment

IOR/EOR - Improved Oil Recovery/ Enhanced Oil Recovery

LNG - Liquefied Natural Gas

LPG - Liquefied Petroleum Gas

LPG (DOM) - Liquefied Petroleum Gas for Domestic supply

LSHS - Low Sulphur Heavy Stock

MAT - Minimum Alternate Tax

MMBTU - Million British Thermal Units

MMSCMD - Million Metric Standard Cubic Meter Per Day

MMTPA - Million Metric Tonnes Per Annum

MoP&NG - Ministry of Petroleum and Natural Gas

MT/MMT - Metric Tonnes/ Million Metric Tonnes

NCCD - National Calamity Contingent Duty

NCERT - National Council of Eduction Research and Training

NELP - New Exploration Licensing Policy

NGHP - National Gas Hydrate Programme

NTPC - National Thermal Power Corporation

OISD - Oil Industry Safety Directorate

OMC - Oil Marketing Companies

PDS - Public Distribution Scheme

PFCE - Private Final Consumption Expenditure

PNG - Piped Natural Gas

PNGRB - Petroleum and Natural Gas Regulatory Board

POL - Petroleum Oil & Lubricants

PSC - Production Sharing Contract

RIL - Reliance Industries Limited

RLNG - Regasified Liquid Natural Gas

SAED - Special Additional Excise Duty

SEZ - Special Economic Zone

SKO (PDS) - Super Kerosene Oil supplied through Public Distribution System

TMT - Thermo Mechanically Treated

UCG - Underground Coal Gasification

UIDAI - Unique Identification Authority of India

VAT - Value Added Tax

WPI - Wholesale Price Index

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Union Oil Budget Booklet

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