What’s changed
A positive has been the reduction in the customs duty on liquefied natural gas (LNG) from 5 per cent to 2.5 per cent. While there were hopes that LNG will be exempt from duty, the government has walked half the way. Until now, LNG import enjoyed duty exemption if the fuel was used for power generation for public distribution. The duty relaxation now will give a leg-up to natural gas, a clean fuel, and benefit many players. This includes importers such as Petronet LNG, transmitters such as GAIL (India), city gas distributors such as Indraprastha Gas and Mahanagar Gas and also companies in other user industries such as fertilisers and steel.
The announcement for setting up two more strategic crude oil reserves in addition to the three reserves set up now, will add to the country’s energy security in the long-run. But quick execution of the proposed projects, unlike in the past, is imperative. Also, the Budget has exempted from tax, the sale of leftover stock in strategic petroleum reserves by foreign companies after expiry of the arrangement. This seems to be with the intent of facilitating India’s recent agreement with the UAE to fill up half of the Mangalore facility.
An integrated public sector ‘oil major’, proposed in the Budget could create an Indian energy behemoth. This could help, among other things, while bidding for international energy assets. But the proposal also has critics who favour keeping the oil and gas companies separate in the interest of competition and capitalising on core competencies. What shape this proposal will take – whether all the public sector upstream and downstream companies will merge, or whether there will be two or three separate majors in different segments - needs to be seen.
Most oil and gas stocks gained on the bourses following the Budget announcements. But there have been many disappointments too. The Budget did not rationalise cess on oil – a key demand following the recent rally in oil prices. Also, there were no incentives for domestic production, or clarity on the applicability of the Goods and Service Tax (GST) on key petroleum products. Besides, exploration activities were not exempt from service tax. Also, the Budget did not do away with service tax on cash calls by operators on non-operator partners in production sharing contracts.
Background
There was hope that the Government will announce tax incentives to encourage domestic oil and gas production and reduce the high import dependency. The rally in oil prices over the past couple of months has resulted in excess burden for oil producers at the 20 per cent ad valorem cess announced last year. There were hopes that the cess rate would be cut.
The verdict
Many were the demands. Little was fulfilled.