Direct Tax Code – Oil & Gas sector

Key issues and implications

Major issues concerning Oil & Gas Sector

Direct Tax Code Bill 2009Page 3

1. MAT

Existing Provisions DTC

► 15% of the book profits

► Credit allowed for next 10 assessment

years

► 2% on the values of gross assets

► Gross assets includes all assets

(including work in progress) as reduced

by the accumulated depreciation and

debit balance in profit and loss account

if already included in the value of assets

► No credit allowed in subsequent years

Direct Tax Code Bill 2009Page 4

Impact of above provisions

► Oil & gas sector is highly capital intensive, even in initial years when profits

may be nil or very low there could be MAT

► MAT implication even on exploration CWIP

Direct Tax Code Bill 2009Page 5

2. Tax Holiday-Upstream sector

Existing Provisions DTC

► 7 year tax holiday for commercial

production of mineral oil

► Ambiguity in case of availability of tax

holiday on natural gas, except NELP-

VIII and CBM-IV

► The above provisions also applies if the

undertaking is transferred in an

amalgamation or a demerger

► No provisions for any profit-linked

incentives

► The grandfathering provisions seek to

continue the tax holiday under the Act

only if the undertaking is eligible for

such tax holiday in financial year 2010

Direct Tax Code Bill 2009Page 6

Impact of above provisions

► Tax holiday for upstream operations is available once the commercial production is commenced. Accordingly, irrespective of the present controversy around tax holiday on gas blocks, it seems the tax holiday may not be available even for existing blocks if they do not start commercial production within financial year 2009-10

Direct Tax Code Bill 2009Page 7

3. Tax Incentive - Midstream sector

Existing Provisions DTC

► Investment linked tax incentives

available for the business of laying and

operating cross country natural gas or

crude or petroleum oil pipeline network

for distribution, including storage

facilities being an integral part of such

networks.

► Entire capital expenditure (other than

expenditure incurred on land, goodwill,

or financial instruments) allowed as a

deduction in the year in which it is

incurred

► No deduction of this expenditure will be

allowed under any other section

► Similar provisions prescribed under

DTC

► DTC specifies the receipts which should

be considered as income and the

expenses which should be allowed as

deduction.

Direct Tax Code Bill 2009Page 8

4. Tax Holiday- Downstream sector

Existing Provisions DTC

► Section 80IB(9) provides for 7 year tax

holiday for an undertaking engaged in

refining of mineral oil and which begins

operation upto 31 March 2012

► No provisions for any profit-linked

incentives

► The grandfathering provisions seek to

continue the tax holiday under the Act

only if the undertaking is eligible for

such tax holiday in financial year 2010

Direct Tax Code Bill 2009Page 9

5. Taxability as Association of Persons (AOP) –

Upstream sector

Existing Provisions DTC

► Specific exemption from AOP for

upstream companies

► No similar provision in DTC

Direct Tax Code Bill 2009Page 10

7. Residency Rule

Existing Provisions DTC

► As per section 6(3), a company is said

to be resident if during the year, the

control and management of its affairs is

situated wholly in India.

► As per DTC, a company shall be

resident if its place of control and

management, at any time in the year, is

wholly or partly in India.

Direct Tax Code Bill 2009Page 11

9. Site Restoration Fund

Existing Provisions DTC

Section 33ABA

► Deduction permitted for deposit in SF

Account

Eleventh Schedule

► No similar provision

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