Budget expectations for 2017: Freeing up gas
The oil and gas sector is hoping for the Budget to provide incentives to increase domestic production, rationalise cess on oil, and provide clarity on the applicability of the Goods and Services Tax (GST) on key petroleum products.
The past few years have seen some major reforms in the oil and gas sector in India. Fuel pricing reforms, in conjunction with the crash in crude oil prices since June 2014, have greatly improved the financial performance of the public sector oil marketing companies — Indian Oil, BPCL and HPCL. Also, the public sector oil and gas producers, ONGC and Oil India, were somewhat shielded from the oil rout, as their subsidy burden also dipped sharply.
Besides, the new Hydrocarbon Exploration Licensing Policy (HELP) has progressive provisions to encourage exploration activity in the country.
More reforms in order
But more needs to be done. India’s energy import dependence remains very high more than 80 per cent for crude oil and about 40 per cent for gas. Domestic output has been stagnating or declining due to old and challenging fields, and unfavourable gas pricing policies.
To reduce import dependence, the government can consider more pricing freedom for domestic gas production from producing blocks. When oil prices can be market-linked, there is little rationale in gas prices being determined by complex formulae.
Last year’s Budget removed the deduction under Section 80IB to undertakings that commence production after April 2017. This was probably in line with the stated policy of phasing out exemptions over the years while moderating corporate tax rates. But given the inherently risky and long-gestation nature of hydrocarbon projects, some tax breaks are in order. Also, there is a case for exemption of exploration activities from service tax, a long-pending demand of upstream companies.
The previous Budget cut the cess on domestically produced crude oil from a fixed ₹4,500 per tonne to 20 per cent ad valorem. The cess is applicable to output from blocks allotted outside the erstwhile NELP mechanism.
But recent developments have upset calculations. The sharp rally in oil prices over the past couple of months has seen the fuel rise to $55-60 a barrel. At these levels, the 20 per cent cess translates into excess burden. A cut in the cess rate would provide relief to oil producers.
Clarity on GST
Five key petro-products crude oil, natural gas, petrol, diesel and aviation turbine fuel have been kept out of the GST ambit for now, with the decision left to the GST Council. These products being outside the GST net would result in sector players being subject to both old and new tax systems, denial of input tax credits and increase in costs. A roadmap in the Budget to include these products under GST, if needed under the zero-rate category, would assuage concerns.
Other sector demands include doing away with service tax on cash calls by operators on non-operator partners in production sharing contracts, removing import duty on liquefied natural gas (LNG), and excise duty on compressed natural gas (CNG).