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Petroleum, finance ministries clash over tax norms for oil exploration companies

The petroleum ministry has warned of an adverse impact on the flow of funds to exploration projects if the finance ministry continues to oppose its proposal to allow private oil companies to set off losses caused by unsuccessful exploration on an annual basis for tax purposes.

Such setting-off is permitted under the draft petroleum tax code.

The delay in finalising the code has held up the commencement of exploration under the new exploration policy.

In an internal note, the petroleum ministry has urged the finance ministry's department of revenue to approve the draft code, pending for nearly two years in its present form, with necessary modifications.

The ministry has also opposed the proposal to allow the revenue department to draft and issue the code, or to entrust the job to the law ministry, or to ask the petroleum ministry's own consultants, Price Waterhouse, to redraft it with assistance from all three departments.

All these options, the note said, will only delay the invitation of bids for exploration rounds.

It said if oil companies participating in the exploration rounds are required to pay tax until they finally surrender the area contracted, then they may not invest money in further exploration.

It said the revenue department's suggestion to redraft the code to incorporate all its suggestions was not understandable since a lot of effort has gone into the code already drafted. Moreover, it said, 16 months have passed since the draft PTC was prepared with the help of the consultant.

The draft PTC was given to the revenue department in June 1997. The petroleum ministry wants that draft to be the base document for discussion, since it has been updated from time to time, after discussions with the revenue department.

The note has also drawn attention to section 2(2) of the draft code, which says that in the event of any inconsistency between the court and enactment / rule / notification, the relevant act / rule / notification shall apply.

Therefore, the supremacy of the income-tax and customs laws has been maintained, it said, adding that the PTC is only a compilation to help interested investors in the upstream sector.

The note pointed out that linking the tax concession on unsuccessful exploration costs to surrender of the area, even where companies have production / income tax for set-off, would amount to withdrawal of the concession itself.

Since the revenue department has reservations on this provision, the petroleum ministry held discussions with Price Waterhouse and the Commonwealth secretariat. These consultations revealed that international practice is to reckon and allow set-off of the unsuccessful exploration losses on an annual basis.

The note pointed out that the rate of tax for Indian companies is 35 per cent and 48 per cent for foreign firms.

The note explained that if these companies have to pay tax until they finally surrender the area, then, in all likelihood, they may not invest funds in further exploration in the first place, or the quantum of exploration money out of their existing production income may be reduced.

Referring to the revenue department's observation that the site restoration fund scheme needs to be drafted in line with the provisions of the Income Tax Act, the note has pointed out that the scheme was formulated after discussions with the revenue department and the Department of Economic Affairs.

The scheme was sent to the revenue department in April this year for its concurrence. The department pressed for an amendment to the ITA. So section 33 was enacted in the ITA during the budget session of Parliament.

The scheme now conforms to the newly enacted section. Which is why the note said, "We are not very clear about the observation of the Department of Revenue that the scheme needs to be drafted in line with the provisions of the Income Tax Act."

A site restoration fund is needed to abandon the contract area in an environmentally safe manner. Contributions to this fund are deductible for purposes of income tax. The scheme is an insurance against fly-by-night operators who may abandon a site without prior restoration. The funds in the scheme may be used for the purpose.

The note recalled that the revenue department had agreed in principle to the scheme.

UNI

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