(Photo: iStock)
(Photo: iStock)

Investments into oil and gas blocks eligible for depreciation: CBDT

  • An amounts paid for the stake would be treated as an 'intangible asset' eligible for claim of depreciation after adjusting for the cost attributable to tangible assets, CBDT said
  • The clarification, which has retrospective effect, could help in settling disputes and improve ease of doing business

New Delhi: Investors are eligible for claiming depreciation on the amount spent on buying oil and gas blocks after adjusting for the cost of tangible assets, the government has said in a circular issued to clarify the treatment of investments into India’s energy assets.

The circular signed on Monday by the Central Board of Direct Taxes (CBDT) seeks to clarify how the treatment of investments into energy assets should be treated in the hands of the investor and to reduce tax disputes. Already there is specific provision in the Income Tax Act on how the investments should be treated in the hands of the seller. The clarification, which has retrospective effect, could help in settling disputes and improve ease of doing business.

The CBDT said that the amount paid for acquiring a stake in a production sharing contract (PSC)—the license given to investors for exploration and production of natural resources from the leased block—should be treated as an amount paid to acquire the underlying assets. Therefore, such amounts paid for the stake would be treated as an 'intangible asset' eligible for claim of depreciation after adjusting for the cost attributable to tangible assets.

Exploration and production of crude oil and natural gas has been an area of disputes globally as it is a high risk and investment heavy business with long gestation periods. India has been trying to attract domestic and foreign investments into its hydrocarbon assets to improve energy security. The government has recently introduced an open acreage licensing policy that gives liberty to investors to bid for any area of their choice for exploration.

According to Neeraj Agarwala, partner at Nangia Advisors (Andersen Global), the clarification was aimed at bringing clarify and certainty to the tax regime in India. “Several industry representations were made to the CBDT that there is a need to clarify the tax treatment of expenditure on acquisition of participating interest in upstream oil and gas blocks. The circular will bring cheer to the industry and hopefully India will see an increase in domestic and foreign investment," said Agarwala.

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