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Finance Minister Arun Jaitley will present his third Budget. Given the global economic headwinds and the new oil order, I am confident of seeing a fundamental change in the government’s approach to the oil and gas industry.
The most critical piece of reform would be the applicability of cess. It is a specific tax on oil production and impacts more than 95 per cent of domestic production, even as imports go untaxed. At current oil price levels, the cess rate constitutes close to 30 per cent of the realised price of oil.
Cess thus acts as a significant disincentive to domestic production. The industry is looking forward to an ad-valorem rate of 5 to 8 per cent of the realised price of oil.
Retrospective tax
I am very hopeful that the Finance Minister will address specific concerns of the industry with respect to the applicability of service tax. Particularly, service tax exemption with respect to general and administrative cost (“common costs”) apportioned by the operator to an unincorporated joint venture and for services provided in relation to the exploration and production activities. I am hopeful that the government will address the retrospective tax issue and thereby send a positive signal to the people investing in India.
The Finance Minister in his last Budget speech declared rationalisation and removal of various kinds of tax exemptions and incentives for corporate taxpayers. This is a step in the right direction. For critically important sectors like oil & and gas and other strategic sectors, taxation policies should enable reduction in import dependence and remove any disincentives to domestic production.
In addition to the above measures, we look forward to a roadmap that widens the existing narrow tax base, increases tax compliance and sets the pace of fundamental tax administration reforms. These measures, in the long run, would be more efficient and effective, and enable a simple tax system with moderate rates.
I am hopeful that the forthcoming Budget will be an initiator of a clear policy framework towards bringing in a moderate, predictable, non-adversarial and investor-friendly tax system that encourages investment climate and confidence.
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