INSIDE VIEW. Oil and gas sector needs some energy boost

February reminds us all of the Budget, and the Budget is one way to stimulate the economy. Here are the five energy boosters that the oil and gas sector badly needs:

1. A tax holiday was promised to attract risk capital for exploration and the Centre had highlighted it as a major incentive at the New Exploration Licensing Policy road shows. Later, this was disallowed saying that mineral oil was not defined in Section 80IB(9) of the Income Tax Act. The Centre went back on its word and sought to define mineral oil to exclude gas. Gas and oil both have hydrocarbons, and no country has attempted to differentiate the two. By restating that mineral oil includes ‘all hydrocarbons’ the Budget can restore clarity and give the relief it had promised.

2. There is a need to reduce the financial burden and increase exploration activities, which have come under the service tax net. Operators of oil and gas fields have been termed as service providers. It must be noted that an operator is a technically competent co-owner and acts as the agent of the Joint Venture does not provide any services and must not be taxed.

3. It is only a matter of time before the Goods and Services tax is adopted. But there are some indications that the petroleum industry may be exempted from this. To develop the gas sector GST should cover petroleum products too.

4. Pre-NELP Production Sharing Contract guaranteed fiscal stability and required the licensee to bear the cess and royalty costs. Despite this, rates of cess and royalty continue to rise making it unviable for the licensee. As a result several marginal and matured fields are struggling to survive. Freezing the cess and royalty at the rates that prevailed on the date of signing of respective PSC will be a boon.

5. The Budget should allow at least one-third of the cess being collected under Oil Industry Development Act (OIDA) to be used for development of the oil industry.

Elango is Managing Director, Hindustan Oil Exploration Company Limited