Direct Tax Code - Oil and Gas Sector by Akhil Sambar, Ernst & Young

1. Direct Tax Code – Oil & Gas sector
Key issues and implications

2. Major issues concerning Oil & Gas Sector

3. 1. MAT
Existing Provisions DTC
► 15% of the book profits ► 2% on the values of gross assets
► Credit allowed for next 10 assessment ► Gross assets includes all assets
years (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
Page 3 Direct Tax Code Bill 2009

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
Page 4 Direct Tax Code Bill 2009

5. 2. Tax Holiday-Upstream sector
Existing Provisions DTC
► 7 year tax holiday for commercial ► No provisions for any profit-linked
production of mineral oil incentives
► Ambiguity in case of availability of tax ► The grandfathering provisions seek to
holiday on natural gas, except NELP- continue the tax holiday under the Act
VIII and CBM-IV only if the undertaking is eligible for
such tax holiday in financial year 2010
► The above provisions also applies if the
undertaking is transferred in an
amalgamation or a demerger
Page 5 Direct Tax Code Bill 2009

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
Page 6 Direct Tax Code Bill 2009

7. 3. Tax Incentive - Midstream sector
Existing Provisions DTC
► Investment linked tax incentives ► Similar provisions prescribed under
available for the business of laying and DTC
operating cross country natural gas or
crude or petroleum oil pipeline network ► DTC specifies the receipts which should
for distribution, including storage be considered as income and the
facilities being an integral part of such expenses which should be allowed as
networks. deduction.
► 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
Page 7 Direct Tax Code Bill 2009

8. 4. Tax Holiday- Downstream sector
Existing Provisions DTC
► Section 80IB(9) provides for 7 year tax ► No provisions for any profit-linked
holiday for an undertaking engaged in incentives
refining of mineral oil and which begins
operation upto 31 March 2012 ► 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
Page 8 Direct Tax Code Bill 2009

9. 5. Taxability as Association of Persons (AOP) –
Upstream sector
Existing Provisions DTC
► Specific exemption from AOP for ► No similar provision in DTC
upstream companies
Page 9 Direct Tax Code Bill 2009

10. 7. Residency Rule
Existing Provisions DTC
► As per section 6(3), a company is said ► As per DTC, a company shall be
to be resident if during the year, the resident if its place of control and
control and management of its affairs is management, at any time in the year, is
situated wholly in India. wholly or partly in India.
Page 10 Direct Tax Code Bill 2009

11. 9. Site Restoration Fund
Existing Provisions DTC
Section 33ABA Eleventh Schedule
► Deduction permitted for deposit in SF ► No similar provision
Account
Page 11 Direct Tax Code Bill 2009

12. Thank you
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