Should those in the business of extracting crude oil in the country continue to get tax holidays even as its global market price has shot up to $110 per barrel? The finance ministry doesn’t think they should, while the petroleum ministry wants it to review its Budget proposal to withdraw the seven-year income-tax holiday for exploration and production (E&P) activities.
The former seeks to minimize loss of revenue, and the latter— given the soon-to-happen seventh round of auctions of the country’s exploration blocks— seeks to make the business as attractive as possible. Their points of view seem to clash— just like in the case of other line ministries wishing that concessions to their respective industries continue forever, leaving the larger picture to the economy’s financial managers.
The question is: Why are tax holidays given? Broadly, in the event a sector fails to attract adequate investments, this is done to make a business more attractive. Three factors suggest oil producers can well do without these concessions or crutches.
First, while it’s true the risks involved in striking oil are high in this very capital-intensive industry, they don’t significantly pare with a stiff dose of tax breaks. Rather, the risk assessment—of finding reserves—is the key to a player’s decision to invest. And here, state-run Oil and Natural Gas Corp. has had a poor record, with a strike rate of less than 30%, as against private players, of more than 60%—six successful wells for every 10 drilled. The performance is getting better with rising prospects of finding hydrocarbons in India.
Second, when a company strikes oil, it sells it to refineries at the global market price—the policy is to allow import parity pricing, as crude can’t be exported since the country is not self-sufficient in this commodity. Today, while the cost of extraction in a good field can be as low as $10 per barrel, the market price is as high as $110 per barrel—the order of returns is quite high, making crude a rather low-hanging fruit for investors.
Third, if the idea is to attract global oil giants—they didn’t come in the earlier rounds under the new exploration and licensing policy, or Nelp, despite the tax holiday. They have not found India a high priority among their global pursuits, given its smaller blocks.
The petroleum ministry may not be able to argue a strong case. Revenue-losing propositions need to be reviewed when markets evolve. But the finance ministry must note that changes in the fiscal regime must be with adequate notice so that business plans don’t get derailed.
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