New Delhi: A proposal in Budget 2007-08 that redefines the country’s borders for tax purposes may have actually been targeted at oil and gas exploration companies such as Reliance Industries, Cairn Energy, Petronet LNG and Essar Oil.
And an official in the government’s revenue department told Mint, on condition of anonymity, that the move could help the government recover service-tax dues from such companies.
The Budget says all activities, including mineral exploration and fishing that are carried out within 200 nautical miles of the country’s borders by Indian and foreign companies would come under the purview of the country’s tax laws. Oil and gas exploration companies, tax experts said, were already covered by these tax laws on account of an earlier notification. However, these companies were avoiding the tax by outsourcing the work to companies that were exclusively in the drilling business. Some, it turns out, were not paying the tax at all.
The companies have to pay a 12% service tax (it was 10% before 2006) on exploration activities. The official at the revenue department said that show-cause notices had already been issued to companies such as Reliance Industries, Cairn Energy, LNG Petronet and Essar Oil last year. “We had sought details of the amount of service tax paid by them; Cairn has paid some tax while the others have either not paid, or paid a negligible amount.” The official said the department did not have an estimate on the tax owed by these firms, but said that they would have to pay 13% on top of that as interest, and another 10-15% as penalty.
The companies have been making a case for exemption from service tax arguing that their business was fraught with risk. They also claimed service tax was not applicable on areas outside the exclusive economic zones where a country can levy and collect tax. Apart from redefining the country’s borders (for tax purposes) to extend beyond exclusive economic zones, Budget 2007 also expands the scope of service tax to include mining, which happens at a site after excavation and exploration.
The revenue department believes that the oil exploration companies can well afford to pay service tax since norms under the New Exploration Licensing Policy (NELP) allow the petroleum ministry to refund any tax they’ve paid.
Meanwhile, the companies themselves claim that they have been paying their tax dues, although some maintained that the tax did not apply to them. David Nisbet, head, group communications, Cairn Energy Plc., said: “We have been paying the service tax. We want it to be removed. We believe that the Budget, which proposes to tax all services outsourced for the mining of mineral, oil or gas, could possibly have a negative impact on the much-needed foreign investments in the oil and gas sector.”
J.D. Basrur, senior vice-president, finance, Essar Oil, also claimed that the company was paying the service tax. “The extension of the tax to the drilling service will increase the drilling cost. We are not in favour of such a move. Levying tax will eat into a company’s exploration budget,” he added. An official at Reliance said the company had paid Rs5.28 crore as service tax in 2005-06.
However, a senior Petronet LNG executive said the tax was not leviable on the company. “It is for the finance ministry to notify regasification as a service. As we are not servicing anyone’s gas, this service tax does not apply to us, as of now.”