New Delhi: The finance ministry is likely to withdraw a 12% service tax on exploration and production (E&P) work in the coming Union Budget, in the wake of lobbying by firms engaged in the energy exploration business, including state-owned Oil and Natural Gas Corp. Ltd (ONGC).
The service tax was introduced in last year’s budget.
“We have been getting representations from the oil and gas exploration companies, who have been arguing that service tax on E&P is having a negative impact on the much-needed foreign investments in the oil and gas sector. We see merit in this case and it is likely that it will be announced in the coming budget,” said a senior government official, who did not wish to be identified.
Mint could not independently ascertain as to whether the finance ministry would accede to the request.
“I myself had discussions with the finance secretary D. Subba Rao and even made a presentation to him. We have been told that the finance ministry will take a considerate view on levying service tax on E&P,” said R.S. Sharma, chairman and managing director of ONGC, India’s largest E&P company.
According to executives in the industry, the removal of the tax will help E&P companies by ensuring that they do not have to pay tax on something that could possibly end up being unremunerative— not all exploration activity results in a find—and improve relations between E&P companies and firms that provide exploration services.
Service tax is usually paid by the company rendering the service—in this case, the companies providing exploration services—but passed on to customers (in this case, the E&P companies). The issue of service tax has resulted in several conflicts between service providers and E&P companies.
“Removing the service tax will remove uncertainty and instability, and remove the awkward situation between the block operators and the service providers. Unlike other services, E&P is a highly capital intensive sector. It is also not a definite investment. Removing it will bring stability in the sector,” added ONGC’s Sharma
The petroleum and natural gas ministry is in favour of the move. “Of the total service tax collection of around Rs50,000 crore in the current fiscal year, service tax on E&P contributed only Rs600 crore. Since it will not make such a huge dent in the collections, there is a substantial case for removing it as it will provide an impetus in the oil and gas exploration sector,” said one official in the ministry, who did not wish to be identified.
Some analysts say the move will provide an impetus to the E&P sector in the country and generate a better response in the seventh round of the new exploration licensing policy, or Nelp, where the government has put up 57 blocks for bids from companies seeking to prospect for oil and gas at an initial estimated investment of $3.5 billion (Rs13,790 crore).
“It will be a good move for the sector. There has been a huge lobby for removing the tax,” said S. Harishanker, executive director and national head (indirect taxes) at audit and consulting firm KPMG India Pvt. Ltd.
Previous rounds of Nelp have seen participation from private oil and gas exploration and production companies. The 162 blocks awarded through these rounds have seen an investment commitment for exploration and production totalling $8 billion, of which $5 billion has been already spent.
Almost 70% of India’s growing energy needs are met through imports.