Mumbai/ New Delhi: The 2009-10 Union Budget left investors and analysts tracking India’s energy sector cold, with most of them saying it took away more through higher rates of taxes than it gave by extending a much-anticipated tax holiday on gas exploration.
In his Budget, finance minister Pranab Mukherjee announced a seven-year tax holiday on natural gas exploration and production, but raised the minimum alternate tax (MAT) from 10% to 15%, effectively negating?gains?oil and gas firms could have expected from the former proposal. This is one of the biggest negatives for all firms, irrespective of sector.
An analyst with a Mumbai-based foreign brokerage said the positives from this Budget are “either anticipated or mere pies in the sky” as “there is no clear timeline”, but that the negative impact arising out of MAT is “clear and visible”.
This anomaly was reflected in the Bombay Stock Exchange’s (BSE’s) oil and gas index—a sectoral index of 11 listed oil and gas exploration, refining and distributing companies—which fell 5.81% to close at 9,039.22 points on Monday. It moved in tandem with BSE’s bellwether index Sensex, which slipped 5.83%.
“There’s nothing in the Budget on oil price deregulation, at least in a definitive manner or with a clear timeline. The tax holiday for gas production has been given, but most of us had already factored that in our models. The increase in minimum alternate tax is the real deep cut,” said the same analyst, who rated the Budget at “3, may be 4” on a scale of 10 for the energy sector.
The Budget allowed for setting up of an “expert group to advise on a viable and sustainable system of pricing petroleum products”, but left out the mechanics of how this deregulation would be achieved, saying that the details would be announced later.
Taking cognizance of the gas production from Krishna-Godavari basin, the Budget has also proposed developing a blueprint for long-distance gas highways that will eventually become a national gas grid.
The Budget extended the tax holiday, available under section 80-IB (9) of the Income-tax Act, to profits from the commercial production or refining of natural gas, in new oil and gas blocks that are going to auctioned soon as part of eighth round of New Exploration Licensing Policy (Nelp).
This, said analysts, was one of the few, but anticipated, positives from the Budget. Until now, the tax break only covered production of crude oil, creating an anomaly given the two hydrocarbon forms are usually found in close proximity. “They will benefit in the longer term but have no immediate benefit,” said Maulik Patel, sector analysts at Mumbai-based brokerage KR Choksey Shares and Securities Pvt. Ltd.
One Centre initiative, however, that will likely get a boost from the budgetary announcements is the eighth round of bidding oil and gas blocks under Nelp, which could have been affected if the tax holiday hadn’t been extended.
KR Choksey’s Patel also said that Nelp VIII will now evince interest from all the international energy firms. Another provision in the Budget also enlarged the scope of service tax by extending its applicability to “installations, structures and vessels in the entire continental shelf of India and exclusive economic zones of India”. This could imply a higher service tax outgo for hydrocarbon explorers such as Reliance Industries Ltd.