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Between the lines

Implications of the Union
Budget 2011 on Oil & Gas
Industry

Publication release:
Senior Management Meet
1 - 2 March 2011
organized by
2 PwC
Contents
India Union Budget 2011 perspective 4

Economic survey 2010-11 6

Analysis of Union Budget 2011-12 12

Major pre-budget expectation of oil & gas industry 18

Significant policy changes and initiatives in oil & gas industry 26

Commodity balance of petroleum and petroleum products 30

India Union Budget 2011: Implication on Oil & Gas Industry 3

India Union
Budget 2011
Perspective
The Union Budget for 2011-12 was
presented against a challenging
macroeconomic environment with the
need to balance several conflicting
objectives like tackling inflation without
impairing growth and emphasizing social
inclusion at a time when fiscal
consolidation is of paramount importance.
Reviving investor confidence and market
sentiment, badly hurt because of a series
of perceived governance and policy issues
was also high on the expectations list.
The budget, however, was devoid of any
major announcements.
Oil & gas industry provides largest
contribution to the exchequer, and
remains the focus of state and central
governments for collection of taxes. The
sector also receives attention of the
Government owing to the drive to achieve
energy security. Industry always looks
forward to Union Budget to remove any
anomalies in taxation and policy.
The Economic Survey 2011 projects
growth in production of crude oil by
12.67 per cent in 2010-11, whereas that in
gas production by nearly the same 12.80
per cent. These were caused primarily by
the Barmer field discovered six years back
and KG D6 block eight years. These blocks
were awarded years before they were
discovered. This illustrates the long
gestation of E&P assets for
commercialisation, let alone the
uncertainty of discoveries. The sector has
a challenge at hand of rising from the low
investor response in the eighth round of
awards under NELP and attracting
investments to overcome energy
security challenges.
Investors appeared to have considered
high prices of crude oil an important
reason to invest during the Seventh round
under NELP. The high prices are back
again in 2011 after having dropped
substantially during economic meltdown,
with an expectation that now in Ninth
round of NELP, investors interest will be
on rise. Budget 2011 has proposed to Going by the pre-budget expectations of
remove ambiguity in tax provisions, albeit the oil & gas and associated industry, and
against the interests of investors, by the views expressed in the Survey, the
completely withdrawing the tax breaks Budget 2011 may tend to suggest that the
for crude oil let alone for gas. industry aligns the thinking with the
Additionally, new provisions relating to structural reforms the Government
tax deduction at source would make E&P is aiming at and take the challenges
service providers look away from India. in stride.
Consequently, E&P companies are
From the economic stand point, a major
expected to find services costly and
announcement of the government was
scarce. Factors in the control of the
that it would gradually move towards
Government of fiscal incentives have gone
direct transfer of cash subsidies on LPG
against the interest of investors, but those
and kerosene to people living below the
not in the control like crude oil prices
poverty line. Consequently, this will
have gone favourable. The message to
reduce under-recoveries for oil marketing
investors seems to be that the
companies. The government has provided
Government will drive fiscal consolidation
for Rs 237 billion as its share in under-
agenda, riding on the conducive market
recoveries for 2011-12; significantly lower
environment. Time will prove if this
than the revised estimates of Rs 386
works. If it does not, energy planners have
billion for 2010-11. With the oil prices
a task at hand; challenged with necessity
rising, under-recoveries would increase
of securitising oil and gas supply being
significantly and the government appears
the key contributor to primary energy for
to be prepared to pass on the cost to
decades to come, they will have to face
consumers, lest it intends to increase its
the reality of E&P investment regime
contribution later.
continuing to lose sheen.
The gas sector made significant progress
In October 2010, PwC as knowledge
in the year 2010-11 on commercialisation
partner with PetroFed published “View
of domestic reserves, selection of licensees
from Top”, a report capturing results of
for large gas pipelines and city gas
survey undertaken of views of senior
distribution areas. The Union Budget did
executives of oil companies operating in
not specifically address to the gas sector,
India. The results were revealing in many
probably leaving the sector to investors to
respects and most importantly, an
assess on its merit and develop.
overwhelming 90 per cent of the industry
respondents believe that Government In summary, the oil & gas sector did not
policies are the most important driver for receive any incentives through the Union
India achieving energy equilibrium in the Budget 2011 provisions but leaves it to the
long run. An equal number believe that next few months to the assess impact of
India’s hydrocarbon sector will have the withdrawal of concessions to E&P sector
maximum impetus in the next two and reduction in subsidy provisions.
decades. Around 80 per cent of the
respondents feel that Government policies
will increasingly favour investment in
hydrocarbon development in India.
India Union Budget 2011: Implication on Oil & Gas Industry 5
 Economic
Survey
2010-11

6 PwC
Economic Division of Ministry of Finance,
Government of India released Economic
Survey 2010-11 on February 25, 2011. An
additional chapter for services has been
added this year. The following excerpts of
the Survey provide analysis of the oil &
gas sector and put in perspective the role
and performance of the sector.
State of economy
Indian economy has emerged with
remarkable rapidity form the slowdown
caused by the global financial crisis of
2007-09. With growth in 2009-10 now
estimated at 8.0 per cent by the quick
estimates released on 31 January 2011
and 8.6 per cent in 2010-11 as per the
advance Estimates of the central statistics
office released on 7 February 2011-11.
Growth in the industrial sector as per the
IIP was buoyant during the first two
quarters of the current financial year. The
manufacturing sector, in particular,
showed a remarkable robustness, growing
at rate of 12.6 per cent and 9.7 per cent
respectively during these quarters. For the
current financial year (April-November),
growth in the IIP was placed at 9.5 per
cent as against the 7.4 per cent that
obtained in the corresponding period
last year.
The growth in agriculture marginally
recovered to 0.4 per cent primarily due to
good Rabi crop.
The service sector has played a dominant
role in the Indian economy with a 57.3
per cent share in the GDP. Total services
including construction grew by 9.4 per
cent; total services excluding construction
grew by 9.6 per cent in 2010-11.
Commodity price and inflation
This has been a classic year of economic
recovery for India. The economy
remained on the path of rapid resurgence
which began in 2009-10 and has virtually
returned to the high growth path that it
had achieved during 2005-08, before the
global financial crisis and economic
meltdown.
This has been a difficult year in terms of
inflation, even though the overall trend of
inflation has been downwards. Inflation
peaked around March and April 2010 and volatile, averaging at 83.57 per barrel
has since been on a downward trend during 2008-09 after reaching an
despite a disturbing turnaround in unprecedented US $ 142 per barrel on
December 2010. Inflation in India is 3 July 2008 before declining sharply
measured by a wholesale price index following the global recession. The
(WPI) and four different consumer price monthly movements in oil prices during
indices (CPIs) for various categories of 2007-08 to 2009-10(April-December)
consumers. Interestingly, measured by all clearly reflect this volatility. Current oil
five price indices, it was in single digits prices are around US $ 95-100 per barrel
from October 2010. It can be argued that with Brent crude price even crossing the
the sharp hike in the price of vegetables US $ 100 mark in February 2011 and
seen during December 2010 and January Indian crude oil basket reaching US $
2011, especially of onions, reveals defects 98.4 per barrel on 11 February 2011.
in our food production and marketing The export basket has seen major
systems. What came to light during this compositional changes in this decade with
period was the great difference in prices a 10 per centage point fall in share of
for the same product at the farm gate and manufactures, a 12.6 per centage point
in city retail outlet. gain in share of petroleum crude and
In the current financial year, the average products, and a 3.3 per centage point fall
inflation (April–December 2010) of 9.4 in share of primary products. Share of
per cent was also much higher than the petroleum crude and products increasing
decadal rate 5.3 per cent. The ten-year continuously both in 2009-10 and first
average inflation in fuel was around 8.9 half of 2010-11 to reach 16.9 per cent.
per cent. The major portion of that was
contributed by the high inflation of Growth in POL trade and non-POL Imports
2000-01. (US $ terms)
The year 2009-10 was an abnormal one
due to global slowdown and unfavorable POL POL Net POL
imports exports Imports
monsoon. Notwithstanding, the average
inflation was 3.6 per cent backed by 2005-06 47.3 66.5 41.4
negative inflation in fuel. In the current 2006-07 29.8 60.1 18.9
financial year (2010-11), overall average 2007-08 39.8 52.5 33.7
inflation from April-December 2010 at 9.4
2008-09 17.4 -3 28.7
per cent, is the highest recorded in the
last ten years. 2009-10 -7 2.3 -10.9
2010-11
29.7 66 15.1
External trade (Apr.-Sep.)
Indian merchandise imports, also
affected by global recession, fell to US$
288.4 billion with a negative growth on
-5.0 per cent in 2009-10. This was due to
the fall in growth in petroleum, oil and
lubricant (POL) imports by 7.0 per cent.
POL import growth was low mainly due
to decline in import price of the Indian
crude oil import basket by 16.5 per cent
despite the increase in quantity by
7.7 per cent.
International oil prices recorded
unprecedented rise during 2008 and
remained considerably volatile during the
entire ensuing period. The price of Indian
basket of crude oil which moved in tune
with international oil prices was also
India Union Budget 2011: Implication on Oil & Gas Industry 7
Fiscal Policy Development
During the current financial year (2010-
11), production of crude oil is estimated at
37.96 million metric tons (MMT), which
is about 12.67 per cent higher than the
crude oil production of 33.69 MMT
during 2009-10. The projected production
of Natural Gas including Coal Bed
Methane (CBM), for 2010-11is 53.59
billion cubic metres which is 12.80 per
cent higher than the production of 47.51
BCM in 2009-10. The increase in natural
gas production is primarily from the KG
deepwater block.
Subsidies
As a proportion of the GDP, subsidies have
grown from 1.4 per cent in 2004-05 to
2.3 per cent in 2008-09 (Figure 3.9).
Below-the-line bonds issued in lieu of
subsidies also rose to a level of 1,10,510
crore in 2008-09 (2 per cent of the GDP).
This rise in subsidies owes to the elevated
levels of global crude oil prices and the
less than full pass through of the
international prices to the domestic
markets and is also reflected in fertilizer
subsidies as cost of feedstock is the major
cost. Following the global financial crisis,
there was a brief respite; nevertheless
global crude prices have started to trend
up. Some of the subsidies were also not
targeted properly. The Budget for 2010-11
also announced the intent of bringing all
subsidy-related liabilities to fiscal
accounting. It was in this context that the
recent Budgets have focused on
restructuring the subsidy regime in
fertilizers and petroleum. As a first step,
pricing of petrol (motor spirit) was
liberalized and a modest hike in
administered prices of kerosene and LPG
(liquefied petroleum gas) was announced.
The retail selling price of public
distribution system (PDS) kerosene was
increased by 3 per litre in Delhi with
corresponding increase in the rest of the
country and the price of domestic LPG
was increased by 35 per cylinder (14.2
kg) in Delhi with corresponding increase
in the rest of the country. FDI inflow into
Petroleum industry including oil
exploration in the year 2010-11 (Apr-Nov)
is 542.2 million USD.
8 PwC
Oil and gas production
Efficient and reliable energy supplies are
a precondition for accelerated growth of
the Indian economy. While the energy
needs of the country, especially oil and
gas, are going to increase at a rapid rate
in the coming decades, the indigenous
energy resources are limited. Oil and gas
constitute around 45 per cent of total
energy consumption. At the same time,
the dependence on imports of petroleum
and petroleum products continues to be
around 80 per cent of total oil
consumption in the country. During the
current financial year (2010-11),
production of crude oil is estimated at
37.96 million metric tonne (MMT), which
is about 12.67 per cent higher than the
crude oil production of 33.69 MMT
during 2009-10. The projected production
for natural gas, including coal bed
methane (CBM), for 2010-11 is 53.59
billion cubic metres (BCM) which is 12.80
per cent higher than the production of
47.51 BCM in 2009-10. The increase in
natural gas production is primarily from
the KG deepwater block.
Exploration of Domestic Oil
and Gas
India has an estimated sedimentary area
of 3.14 million sq. km, comprising 26
sedimentary basins. Prior to the adoption
of the New Exploration Licensing Policy
(NELP), only 11 per cent of India’s
sedimentary basin was under exploration.
Since operationalization of the NELP in
1999, the Government of India has
awarded 47.3 per cent of it for
exploration. So far 87 oil and gas
discoveries have been made by private/
joint venture (JV) companies in 26 blocks
and more than 640 MMT of oil-equivalent
hydrocarbon reserves have been added.
As on 1 October 2010, investment made
by Indian and foreign companies was of
the order of US $ 14.8 billion, of which,
US $ 7.5 billion was in hydrocarbon
exploration and US$ 7.3 billion in
development of discoveries.
Offering of NELP Blocks under
NELP IX
The ninth round of NELP (NELPIX) was
launched on 15 October 2010 and 34
exploration blocks including 8 deepwater, 7
shallow water, 11 on-land, and 8 Type-S
on-land were offered. On-land blocks are
spread over six States, namely Assam(2),
Gujarat(11), Madhya Pradesh(2),
Rajasthan(2), Tripura(1), and Uttar
Pradesh(1).
Coal Bed Methane (CBM)
CBM is found embedded in coal seams. The
CBM policy has provided a level playing
field for exploration and commercial
exploitation of CBM by national and
international companies since the 2000.
Total CBM resources in 26 blocks awarded
so far are estimated at 1374 BCM. In the
fourth round, the Government of India has
awarded 7 CBM blocks in the States of
Assam, Chhattisgarh, Jharkhand, Madhya
Pradesh, Orissa, and Tamil Nadu and
signed 33 contracts. Commercial
production of CBM in India has now
become a reality with current CBM gas
production at about one lakh cu. M per day.
The CBM gas produced in the country is
being utilized by nearby industries in and
around Raniganj block in West Bengal.
Underground Coal Gasification
(UCG)
The Oil and Natural Gas Commission
(ONGC) has entered into an Agreement of
Collaboration (AOC-MOU) with the
National Mining Research Centre-
Skochinsky Institute of Mining (NMRC-
SIM) in Russia. In the selected Vastan mine
block, seismic survey was carried out and
18 boreholes drilled for detailed UCG site
characterization. Based on geological,
hydrological, and geo-mechanical data
analysis, Vastan in Gujarat and Hodu Sindri
in Rajasthan have been found suitable for
UCG stations. Pilot production of UCG at
Vastan by the ONGC is expected to
commence by the end of the Eleventh Five
Year Plan period.
India Union Budget 2011: Implication on Oil & Gas Industry
Gas Hydrate
Gas hydrate is at research and development
(R&D) stage world over. A cooperation
programme between the Directorate
General of Hydrocarbons (DGH) and U S
Geological Survey (USGS), USA for
exchange of scientific knowledge and
technical personnel in the field of gas
hydrate and research energy is in progress.
An MOU was recently signed in the area of
marine gas hydrate research and
technology development between the
Leibniz Institute of Marine Sciences,
Germany, and DGH for research on
methane production from gas hydrate by
carbon dioxide sequestration.
Shale Gas
Shale gas is being explored as an important
new source of energy in the country. India
has several shale formations which seem to
hold shale gas. The shale gas formations
are spread over several sedimentary basins
such as Cambay, Gondwana, and KG on
land and Cauvery river. The DGH has
initiated steps to identify prospective areas
for shale gas exploration and acquisition of
additional geoscientific data. An MOU has
been signed with the USA during the visit
of President Obama to India in November
2010 for cooperation in the field of shale
gas assessment and development.
Gas production from KG-D6 Basin
Gas production from KG-D6 began on 1
April 2009. The current gas production
from the KG-D6 field is about 53
MMSCMD, of which about 45 MMSCMD is
being produced from D1 and D3 fields and
about 8 MMSCMD from MA field. The
approved Field Development Plan of D1
and D3 envisages gas production to the
tune of 80 MMSCMD from the third year of
commercial production, i.e. with effect
from 2012-13.
9
Crude Oil Production from
Rajasthan
Crude oil production by the Rajasthan
Cairn Energy India Pvt. Ltd has started in
block RJ-ON- 90/1 with effect from 29
August 2009 at the initial production rate
of 3500 barrels per day. Current crude oil
production from this block is about
1,25,000 bopd. The Government has
designated Indian Oil Corporation
Limited (IOC), Mangalore Refinery and
Petrochemicals Ltd (MRPL), and
Hindustan Petroleum Corporation Ltd
(HPCL) for lifting part of the crude oil
production from this block after
ascertaining the capacity of receiving
refineries of the nominees. The oil
production from this block during
2009-10 was about 0.447 MMT and
during 2010-11, up to 30 November 2010
about 3.12 MMT.
Development of Marginal Fields
Concerted efforts have been made to put
new and marginal fields in production
through in-house resources as well as
through service contracts. The ONGC has
an inventory of 165 marginal fields and
131 have either been monetized or are
under various stages of development
through in-house efforts. So far, 10 fields
have been awarded on service contract.
Equity Oil and Gas from Abroad
In view of unfavorable demand-supply
balance of hydrocarbons in India,
acquiring equity oil and gas assets
overseas is one of the important
components of enhancing energy security.
The Government is encouraging national
oil companies to aggressively pursue
equity oil and gas opportunities overseas.
Apart from ONGC Videsh Limited (OVL)
(40 projects in 15 countries), the other oil
public-sector undertakings (PSUs),
namely Indian Oil Corporation Limited
(IOCL) (9 projects in 6 countries), Oil
India Limited (OIL) (12 projects in 8
countries), Bharat Petroleum Corporation
Limited (BPCL) (12 projects in 7
countries), GAIL (India) Limited (4
projects in 2 countries), and Hindustan
Petroleum Corporation Limited (HPCL) (2
projects in 2 countries), have acquired
10 PwC
overseas exploration acreages. The total expected to be commissioned this year.
investment by oil PSUs (OVL, OIL, GAIL, The terminal will, however, become fully
IOCL, BPCL, and HPCL) overseas is more operational only after completion of
than US$ 13 billion (59,000 crore). OVL breakwater facilities in 2012. PLL is
produced about 8.87 MMTOE oil and setting up an LNG terminal at Kochi
oil-equivalent gas in 2009-10 from its which is planned to be commissioned in
overseas assets in Sudan, Vietnam, 2011-12.
Venezuela, Russia, Syria, Colombia, and
Brazil. The latest acquisition in May 2010 Refining Capacity
by OVL (along with OIL and IOCL) is 11
There had been increase in domestic
per cent participating interest of
refinery capacity by 19.46 per cent in
Carabobo-1 project in the hydrocarbon
2009-10 to reach 177.97 MMT from
rich Orinoco belt of Venezuela, with
148.97 MMT in 2008-09 and it is further
proposed investment of US$ 1.3 billion.
expected to reach 185.40 MMT by 1 April
The projected production is 400,000 bopd
2011 and 238.96 MMT by the end of
and the first oil is expected in 2013.
2011-12. Refinery production (crude
throughput) during 2009-10 was160.03
Import of Liquefied Natural Gas MMT (excluding Jamnagar Refinery
(LNG) under special economic zone [SEZ] by
Petronet LNG Limited (PLL), promoted by Reliance Industry Ltd) showing an
ONGC, GAIL, IOCL, and BPCL, was increase of 16 per cent over 2008-09.
formed to import LNG and set up an LNG During April-November 2010 it was
regasification plant at Dahej. PLL signed a 106.53 MMT.
contract with RasGas, Qatar, in July 1999
for import of 7.5 million metric tonnes per Pipeline Network and City Gas
annum (mmtpa) LNG for a period of 25 Distribution Network
years. As per the contract, supply of 5
There has been substantial increase in the
mmtpa commenced in 2004 and of the
pipeline network in the country with
balance 2.5 mmtpa in January 2010. In
current figures of 28 product pipelines of
addition to these term contracts, LNG is
11,037 km length and 67.2 MMT
also being sourced from the spot market
capacities. There are also 17 crude
by PLL and Hazira LNG Private Ltd.
pipelines of 7,425 km and additional LPG
(HLPL). During 2009-10, about 8.91
pipelines of over 2,000 km. With
mmtpa LNG was imported. This is
increased availability of gas in the
equivalent to about 31 million standard
country the city gas distribution network
cubic metre per day (mmscmd) of
has been enlarged to cover compressed
regasified LNG (RLNG). During April-
natural gas (CNG) in 19 cities supplying
November 2010, 4.91 mmtpa of LNG has
gas for domestic consumers, public
been imported. 11.44 As part of the
transport, and commercial/industrial
concerted efforts to augment the
entities. In Vision-2015, provision of
country’s supply of LNG, PLL has tied up
pressurized natural gas (PNG) to more
1.44 mmtpa for its Kochi LNG terminal
than 200 cities across the country is
from Exxon Mobil from its share in the
envisaged.
Gorgon project, Australia, for 20 years .
The sale and purchase agreement (SPA)
for it was executed in August 2009. In
addition, GAIL and PLL are exploring the
possibility of import of LNG from various
potential suppliers. 11.45 In order to
handle increased LNG imports, additional
infrastructure is being created in the
country. Capacity at PLL’s Dahej LNG
terminal has been expanded to 10 mmtpa
in July 2009. Dabhol LNG terminal is
Rajiv Gandhi Gramin LPG Vitaran 32-40 lakh new LPG connections are to
Yojana (RGGLVY) be released annually under this scheme.
The ‘Vision-2015’ adopted for the liquefied The annual financial implication of the
petroleum gas (LPG) sector, inter-alia, scheme is estimated to be 490 crore. The
focuses on raising the population proposed budgetary support has been
coverage of LPG in rural areas and areas restricted to the extent of 50 per cent of
where coverage is low. The RGGLVY for the total funds required. The remaining
small-size LPG distribution agencies was 50 per cent would be partly drawn from
launched on 16 October 2009. This the Corporate Social Responsibility Funds
scheme targets coverage of 75 per cent of (CSRFs) of the six major oil companies,
the population by 2015 by release of 5.5 namely ONGC, IOCL, BPCL, HPCL, OIL,
crore new LPG connections. Oil and GAIL and partly borne by the three
marketing companies (OMCs) have issued oil marketing companies (OMCs) namely
advertisements to set up 2329 LPG IOCL, HPCL, and BPCL in the ratio by
distributors in 22 States, namely Andhra each company. It is expected that the
Pradesh, Arunachal Pradesh, Assam, OMCs will incur Rs. 6.00 crore during the
Bihar, Chattisgarh, Gujarat, Himachal current financial year.
Pradesh, Jharkhand, Karnataka, Madhya
Pradesh, Maharashtra, Manipur,
Mizoram, Meghalaya, Nagaland, Orissa,
Rajasthan, Tamil Nadu, Tripura, Uttar
Pradesh, West Bengal, and Pondicherry.
Out of this, 75 LPG distributors have
already been commissioned. Selection for
the rest of the locations is in progress as
per policy.
The price of administered pricing
mechanism (APM) gas produced by
ONGC and OIL has been increased from
June 2010 to the level of US$ 4.2/mmbtu,
less royalty, which is equal to the price of
gas produced by NELP operators.

Free LPG Connections to BPL Rural

Households
A proposal for providing one-time
financial assistance to BPL households for
acquiring new LPG connections are under
consideration of the Government. Under
the proposed scheme, the Government
and Oil Marketing Companies would
provide one-time assistance of 1400 for
acquiring a new LPG connection to a BPL
family. The scheme would cover all
eligible households in the BPL list of the
State Government/Union Territory. About

India Union Budget 2011: Implication on Oil & Gas Industry 11

 Analysis of
Union Budget
2011-12

12 PwC
Direct Taxes
Corporate Tax Rates – Unchanged
No change has been proposed to the rates
of corporate income tax, withholding tax,
dividend distribution tax (DDT) and
capital gains tax. However, the rate of
surcharge however has been proposed to
be reduced from 7.5% to 5% for domestic
companies and from 2.5% to 2% for
foreign companies.
Thus, the effective corporate tax rate and
DDT would be as follow:
Existing Proposed
Assessee
Rates Rates
Corporate
33.22% 32.45%
Tax Rate
Domestic
Dividend
Company
Distribution 16.61% 16.22%
Tax
Foreign Corporate
Company Tax Rate
42.23% 42.02%
Minimum Alternate Tax – Increased
Minimum Alternate Tax (MAT) has been
proposed to be increased from 18% to
18.5%. The effective MAT rate would
increase from 19.93% to 20.00% for
domestic companies and from 19% to
19.44% for foreign companies.
The period to carry forward tax credit
under MAT remains unchanged at ten
years.
Alternate Minimum Tax (AMT) on LLP
MAT provisions which were currently
applicable only to companies have now
been extended o LLPs in modified form of
AMT. AMT will be applicable to LLPs at a
rate of 18.5%. However, in the case of
LLPs AMT will apply to the adjusted total
income (as per the Income Tax provisions)
rather than the adjusted book profits, as is
the case for companies. AMT credit is
available to an LLP for 10 years. The
amendment would be effective from
financial year (FY) 2011-12.
Dividends from foreign subsidiaries
Dividends received from an foreign
subsidiaries (in which the Indian
company holds more than 50% of the
nominal value of equity share capital) are
taxed at 30% plus applicable surcharge
and cess (as is applicable to an Indian
company).
It is proposed to tax the dividend received
by domestic companies from its foreign
subsidiaries for the financial year (FY)
2011-12 at the rate of 15% (effective rate
is 16.22%). No deduction is to be allowed
while computing this dividend income.
Tax holiday on commercial production of
mineral oil
A tax holiday of seven years is allowed to
undertakings engaged in the production
of mineral oil.
It is proposed to insert a sunset clause
providing that this tax holiday would not
be available to blocks licensed under a
contract awarded after March 31, 2011.
Tax holiday for the power sector under
Section 80-IA extended by one year
A tax holiday of ten years in a block of
fifteen years is allowed to the units which
are engaged in the generation,
distribution and transmission of power or
which undertakes substantial renovation
and modernization of existing network of
transmission or distribution lines, if the
unit commences operations on or before
March 31, 2011. It is proposed to extend
this date to March 31, 2012
MAT provisions to apply to Special
Economic Zone (SEZ) Units and SEZ
Developers
SEZ units and developers enjoy an
exemption from MAT. It is proposed to
bring developers and units within the
scope of MAT effective from FY 2011-12.
DDT to apply on SEZ Developers
SEZ developers enjoy an exemption from
DDT. It is proposed that SEZ developers
will be liable to pay DDT on dividends
declared, distributed or paid on or after
June 01, 2011.
India Union Budget 2011: Implication on Oil & Gas Industry
Weighted deduction for scientific research
and development - increased
Any payment to a National Laboratory, a
University, an Indian Institute of
Technology or a specified person for
specific scientific research undertaken
under a programme approved by the
prescribed authority, is eligible for a
weighted deduction of 175%. It is
proposed to increase the above-
mentioned weighted deduction from
175% to 200%.
Investment linked deductions be allowed
on production of fertilizer
The investment linked tax incentive is
provided by way of the 100%
deductibility of capital expenditure
incurred (except on the acquisition of any
land or goodwill or financial instrument)
for certain ‘specified businesses’.
It is proposed to extend the definition of
“specified business” to include the
business of production of fertilizer in
India in a new plant or in a newly
installed capacity in an existing plant.
Income of non-residents from notified
‘Infrastructure debt funds’
The interest income received by a
non-resident from notified infrastructure
debt funds is proposed to be chargeable to
tax at 5% (plus surcharge and cess) on a
gross basis as against a tax rate of 20%
applicable on interest income for non-
residents. The non-residents will not be
required to file the tax returns, if the
appropriate tax is withheld from this
interest income.
The income of these funds shall not be
chargeable to tax. Nonetheless the funds
would be required to file the tax returns.
13
Discouraging transactions with persons
located in notified territories
In order to discourage transactions with
persons located in any country/jurisdiction
which does not effectively exchange
information with India, certain anti-
avoidance measures will be introduced with
effect from June 1, 2011. These measures
would enable the Government to designate
any Country/jurisdiction not exchanging
information with India as a ‘notified
jurisdictional area’. Once a country has been
so notified, transactions between any
taxpayer and a party located in a notified
jurisdictional area would be deemed to be a
transaction between “associated enterprises”
and transfer pricing regulations will apply
accordingly. The following would also be
implications of transacting with persons
located in these jurisdictions:
• No deduction would be allowed on
payments made to any financial
institution unless an authorisation is
issued to the income tax authorities to
seek relevant information from the said
financial institution.
• No deduction would be allowed for any
expenditure or allowance (including
depreciation) unless the taxpayer
maintains the prescribed documents or
provides the prescribed information to
the tax authorities.

• On receipt of any sum from a person

located in one of the above jurisdictional
areas, the burden would be on the
taxpayer to explain the source of such
money in the hands of the payer i.e. the
taxpayer is required to explain the
source of source of such money, failing
which the amount shall be deemed to be
the income of the taxpayer.
• Payments chargeable to tax for persons
located in notified jurisdictional areas
would be liable for tax withholding at
higher of the rates specified/rates in
force or at the rate of 30%.
The definition of the term “person”’ for the
purpose of this provision shall include a
permanent establishment.

14 PwC
 Deductions
• Any sum paid by an employer as
contribution towards a notified pension
scheme shall be allowed as a deduction
in computing its taxable income, up to a
maximum of 10% of the employee’s
salary;
• Presently contributions by employee and
employer to the New Pension System
(NPS) are allowed as deduction upto the
overall limit of INR 100,000. It is now
proposed to exclude the employer’s
contribution from the above limit of INR
100,000.
An investment of INR 20,000 in notified
infrastructure bonds was allowed as a
deduction when computing the total income
in FY 2010-11. This deduction was in
addition to the overall limit of INR 100,000.
It is proposed to extend the said benefit to
investments made in the FY 2011-2012.

Transfer Pricing
• The variation range of 5% between the
arm’s length price determined through
the benchmarking analysis and the price
at which the international transaction
had actually been undertaken between
the associated enterprises, is allowed.
• The said fixed variation of +-5% is
proposed to be replaced with a
percentage to be prescribed by the
Central Government.
• The Transfer Pricing Officer (TPO) has
been empowered to determine the arm’s
length price for any international
transaction not referred to him by the
tax officer.

Liaison Offices
In order to monitor the activities carried out
by foreign companies through liaison offices,
it is proposed that these companies would be
required to file annual information with the
tax authorities within sixty days from the
end of the relevant FY.

Due date for Corporate Tax Returns

It is proposed to extend the due date for
corporate tax returns involving international
transactions to November 30 from the
present date of September 30.

India Union Budget 2011: Implication on Oil & Gas Industry 15

Indirect Tax
General
In the Budget speech, the Finance
Minister (‘FM’) renewed his resolve to
accelerate the efforts towards
introduction of Goods and Services Tax
(GST) and indicated that significant
progress has been made towards reaching
a consensus between Centre and States
for introduction of GST. As a step in this
direction the exemption list under Central
Excise has been pruned with exemption
being withdrawn on 130 products. On the
services side also, new taxable services
have been proposed besides expanding
the scope of certain existing services.
Following are the major highlights
flowing from the Budget speech in
this regard:
• Tabling Constitutional amendment
bill in the Budget session before the
parliament for providing enabling
powers to Centre and State to levy
GST on goods and services equally;
• Preparation of draft Central Goods
and Services Tax Act (‘CGST Act’)
and State Goods and Services Tax
Act (‘SGST Act’) in 2011;
• National Stock and Depository
Limited has been chosen a
technology partner for establishment
of IT Infrastructure and is expected
to roll out a pilot portal by June
2011; and
16 PwC
• Significant progress has been made
towards work of GST Network
(‘GSTN’). Key business processes of
registration, payments and returns
are in advanced stages of finalisation.
Budget 2011 has however not indicated
any roadmap leading to the introduction
of GST from April 2012.
Customs
Tariff
• The median rate of basic customs
duty (‘BCD’) has been maintained at
10%.
• BCD rates of 2%, 2.5% and 3% are
unified at the median rate of 2.5%.
• Rate of duty reduced on Petroleum
Coke from 5% to 2.5%.
• There has been no change in custom
duty rates of crude oil, petrol and
diesel and other petroleum products.
Budget 2010 imposed BCD of 5% on
crude oil. The much needed industry
expectation of exemption from duty
on crude oil has not been addressed.
Non Tariff
• Present requirement of assessment of
bill of entries by the Customs officer
is replaced by self assessment thereof.
• Requirement of cash security done
away with under project imports.
Cenvat
Tariff
• The median rate of excise duty has
been maintained at 10%.
• There has been no change in excise
duty rate for petrol and diesel and
other petroleum products.
Non Tariff
• Definition of capital goods expanded
to include goods used outside factory
for generation of electricity for
captive use within the factory;
• Definition of inputs liberalized to
include all goods used in factory
provided such goods have
relationship with the final product.
Also, CENVAT credit is not available
on:
–– any goods used for construction
of building or civil structure;
–– the goods used in a guesthouse,
club, residential colony meant for
personal use of employees etc.
• Availability of CENVAT credit on
input services made restrictive by:
–– removing reference to services
used for business purposes;
–– disallowing CENVAT credit on
specified services for
constructing buildings, civil
structures and for laying
foundation or making structures
for supporting capital goods;
 –– disallowing CENVAT credit on
specified employee welfare
services such as outdoor catering,
life and health insurance, travel
benefits, etc.
• Definition of exempted services
amended to include trading and
services which are partly exempt
subject to prescribed condition;
• Amount payable under Rule 6(3) on
provision of taxable and exempted
services have been reduced from 6%
to 5%;
• CENVAT credit to be reversed even in
case of partial write off of inputs or
capital goods;
• Removal of erstwhile beneficial Rule
6(5) providing full CENVAT credit in
respect of 16 golden services used for
provision of both taxable and exempt
services;
• The restriction under Rule 6 not
applicable in case taxable services are
provided without payment of service
tax to SEZ unit/zone/developer;
• Service tax paid under reverse charge
as per Section 66A to be eligible
CENVAT credit retrospectively w.e.f.
18.4.2006.
Service Tax
• Service tax rate has been maintained
at 10%.
• Service tax imposed on following
new services with effect from a date
to be notified:
–– Services by air-conditioned
restaurants having license to
serve liquor; and
–– Short-term accommodation in
hotels/inns/clubs/guest houses
etc.
• Expansion in scope of existing
services, including:
–– Health Services;
–– Legal Services;
–– Life Insurance Services and
–– Business Support Services.
• Point of Taxation Rules, 2011
introduced. w.e.f. 01.04.2011 - These
rules determine the point in time
when the services shall be deemed to
be provided. The general rule will be
that the time of provision of service
will be the earliest of the following
dates:
–– Date on which service is provided
or to be provided;
–– Date of invoice and
–– Date of payment.
India Union Budget 2011: Implication on Oil & Gas Industry
Consequential changes have also been
made in the Service Tax Rules, 1994
• Penal provisions rationalized
–– The maximum penalty for delay
in filing of return has been
increased from Rs 2,000/- to Rs
20,000/-. However the existing
rate of penalty is being retained
under Rule 7C of the Service Tax
Rules, 1994
–– Penalty for failure to pay tax
under Section 76 is being halved.
Section 76 provides for Penalty
for failure to pay service tax for
the amount of Rs. 200 per day
for period of default or 2% of tax
involved, whichever is higher.
Maximum penalty reduced to
50% of the tax amount
–– Maximum penalty u/s 77 for
contravention of various
provisions of the Act increased
from Rs 5000/- to Rs 10000/-
• The rate of interest for delay in
payment of taxes is being increased
from 13% to 18% p.a w.e.f 1.4.2011.
17
 Major
Pre-Budget
Expectation
of Oil & Gas
Industry

18 PwC
Direct Tax
Upstream
Income Tax Holiday under Section
80IB (9)
The Income tax department is adopting a
narrow interpretation of the tax holiday
provisions of Section 80IB (9) to say that
the holiday is available only if exploration
results in the striking of crude oil, and it
is consequently holding that profits made
on the sale of gas, where gas is struck, are
not eligible for the income tax holiday.
The Union’s Finance Minister, during
discussion on the Finance Bill, 2008, gave
assurances that the benefit of section
80-IB (9), as finally interpreted by the
courts, would be applicable to all
exploration and production contracts. The
Finance (No.2) Act, 2009 has inserted
new clauses to clarify that the tax holiday
would be available on gas produced from
blocks licensed under the eighth round of
bidding under New Exploration Licensing
Policy (NELP) and fourth round of
bidding under the Coal Bed Methane
(CBM). The insertion of these clauses may
suggest that gas produced from the blocks
other than those awarded under NELP
VIII /CBM IV are not entitled to the
benefit of tax holiday.
of any law for the time being in force or
has been awarded by the Central or a
State Government in any other manner,
shall be treated as a single “undertaking”
for the purpose of claiming a tax holiday
under section 80IB(9). This amendment
has virtually overturned the already
decided cases which have gone in the
favour of assessee by making
retrospective legal amendments to
re-write the law from financial year
1999-2000, pre-judging the matters
pending before courts and tribunals.
These changes are detrimental to the
nation’s energy security and also cause
hardships to the taxpayers who have
acted upon the pre-amendment provisions
of the Act.
However, if at all the meaning of
“undertaking” is to be defined to reflect a
change in government policy in regard to
the oil and gas sector, a clarification was
expected that such change will operate
only on a prospective basis i.e., from
financial year 2009-10.
Tax Holiday to Exploration &
Production(E&P) Companies to be
Enhanced to Ten Years from Seven Years
and Flexibility to Choose Period of Ten
Years of Tax Holiday out of 15 Years
to choose the period of a tax holiday
during the initial fifteen year period of
their operation. Alternatively, it was
expected that Section 80-IA benefits will
be extended to E&P companies engaged
in the exploration and production of oil
and gas.
Exemption from Minimum Alternate Tax
(MAT) (Section 115JB)
The exploration and extraction of
mineral oil has been given a tax holiday
u/s 80-IB (9). However, this provision has
been nullified to an extent by applying
the provisions of MAT under Section 115
JB. These companies normally earn
higher book profits in the initial years
after commercial production begins, since
the tax deductions in respect of
exploration and drilling expenditure are
granted on an accelerated basis. It was
therefore expected that the business of
the exploration and extraction of
mineral oil will be exempted from MAT
under Section 115JB of the Income Tax
Act, 1961.

It was therefore expected that this year
budget will clarify that the benefit of tax
holiday would be available on the gas
produced from all the blocks awarded
under NELP / CBM or in any other
manner by Central or State Government.
Availability of Tax Holiday to Each Well)
As per legal pronouncements and general
provisions of the Income Tax Act,
1961(Act), each well can be considered as
a separate undertaking for the purpose of
tax holiday under section 80IB(9).
However, the Finance (No. 2) Act, 2009
has amended the provisions of Act to
clarify that all blocks licensed under a
single contract, which has been awarded
under the New Exploration Licensing
Policy or has been awarded in pursuance
Tax holiday u/s 80-IB(9) is available to
E&P companies for seven consecutive
years starting from the year in which
commercial production commences. The
period of seven years of tax holiday is less
than the tax holiday period available to
companies in the infrastructure sector,
such as power generation and distribution
companies. Furthermore, during the
initial seven years, companies have large
expenditure to set off and hence the
actual benefit of the tax holiday does not
reach them.
Like Infrastructure, E&P Industry is also
highly capital intensive with a long
gestation period. Thus, it was expected
that the provisions of Section 80-IB (9)
would be amended to extend the period
of seven years of tax holiday to ten years
and to allow flexibility to E&P companies

India Union Budget 2011: Implication on Oil & Gas Industry 19

Introduction of Specific Provisions in the
Income Tax Act Regarding ‘Farm-in costs’
Another long pending demand of the E&P
sector is the introduction of specific
provisions in the Income Tax Act, 1961
regarding the treatment of ‘farm-in costs’.
The tax treatment of such payments
remains unclear and gives rise to disputes
between the industry and the tax
department. It discourages acquisitions in
the E&P sector since the magnitude of tax
costs are high and can result in proposed
transactions becoming uneconomical. A
‘farm-in’ is a transaction unique to the
E&P sector. As a result of a farm-in in an
existing exploration block, the company
gets a share in the licenses and rights on
it which are originally granted to the
company farming out of a block. Thus, it
was expected that to avoid possibility of
any dispute, these costs would be
specifically be recognized as an intangible
asset eligible for depreciation under
section 32 of the Income Tax Act, 1961.
Weighted Deduction in Line with R&D
Expenses to be Introduced under Section
42 of the Income Tax Act
Section 42 of the Act allows deductions in
respect of capital and revenue
expenditure actually incurred by the
assessee in respect of drilling and
exploration activities. The fact that capital
expenditure is also allowed as a
deduction beginning with the year of
commercial production only amounts to
an accelerated deduction of the
expenditure incurred and does not
amount to any additional deduction or
incentive being granted to the assessee.
It is important that expenditure in respect
of drilling and exploration activities be
treated the same as R&D expenditure to
encourage the E&P sector to adopt a more
aggressive approach to invest in areas
even where the probability of striking oil
reserves is lower than in other areas. It
was therefore expected that weighted
deduction of 200% of the actual expenses
incurred by the assessee in respect of
drilling and exploration activities would
be allowed to the assessee under section
42 of the Income Tax Act.
20 PwC
Deduction for Expenditure Incurred on
Drilling and Exploration Activities by an
Indian Company with an Overseas
Production Block under Section 37 of the
Income Tax Act
An Indian E&P company typically does
not enter into Section 42 agreements with
the Central Government in respect of its
overseas exploration block. Thus, section
42 does not apply to such companies
with respect to their overseas
exploration blocks.
However, where they have already started
their exploration activities, the deduction
for the expenditure incurred on drilling
and exploration activities in respect of the
overseas blocks should be available under
section 37 of the Income Tax Act, 1961.
It was therefore expected that the
Government of India, by way of an
amendment to the Act, will clarify
this matter.
Deduction for Infructuous or Abortive
Exploration Expenses u/s 42
Typically the provisions of the Production
Sharing Contract does not require the
area to be surrendered as a prerequisite
for claiming the deduction of unsuccessful
exploration cost. However, under section
42 of the Income Tax Act, 1961 provides
for a deduction for infructuous or abortive
exploration expenses is not allowed until
the surrender of the area, even though
the expenses are already charged off in
the books of accounts as per the
company’s accounting practices. As a
result of the requirement to surrender the
area prior to the beginning of commercial
production, the assessee is not able to
avail the deduction, from taxable income,
of expenses on account of abortive
exploration in the year when expenditure
is incurred. It was expected that the
requirement to ‘surrender’ the area will
be deleted from Section 42(1)(a) and that
deduction will be allowed from the
year in which the area is abandoned
as abortive.
Midstream
Grant of Profit Linked Tax Holiday to
Cross Country Pipelines for Crude and
Petroleum Products
The Finance (No.2) Act, 2009 has
withdrawn the profit linked tax holiday
provided to undertakings engaged in
laying and operating natural gas
distribution networks including pipelines
and storage facilities and provided 100%
deduction for any expenditure of capital
nature incurred, wholly and exclusively
for the purpose of such business.
Such incentive does not provide any real
benefit but creates only a timing
difference as the capital expenditure
incurred wholly and exclusively for the
purpose of business is anyways allowed
over a number of years. The profit based
tax holiday available to such companies
under section 80-IA was however a
real benefit.
Since, pipelines have several distinct
advantages over other modes of
transport in terms of safety, eco-
friendliness, lower product losses etc, it
was therefore expected that the benefit of
tax holiday under section 80-IA will be
returned to the crude and petroleum
product pipelines.
Investment linked incentive under
section 35AD
The benefits of investment-linked tax
holiday are provided only to the “cross
country” natural gas, crude or petroleum
pipeline network for distribution,
including storage facilities being an
integral part of such network.
Since pipelines have several distinct
advantages over other modes of
transport, it was expected that this
benefit will be extended to intra-city and
intra-state gas distribution network used
for transporting natural gas and it was
expected that the Government of India,
by way of an amendment to the Act, will
define the term “cross country” in relation
to the gas distribution network.
Downstream
Extending depreciation benefits available
to Pollution Control Equipment to Capital
Investments made by Refineries for
producing Fuels in accordance with
stringent emission norms
Refineries are making substantial capital
investments to produce fuels under
stringent emission standards in order to
reduce pollution. It was expected that
such capital investment, being a pollution
control measure, will be given the
depreciation benefits available to other
pollution control equipment.
Extending the sunset clause beyond 31
March 2012 for tax holiday under Section
80IB(9) for undertakings engaged in
refining of mineral oil
The seven year tax holiday is available to
undertaking engaged in refining of
mineral oil, which begins such refining on
or after October 1, 1998, but not later
than March 31, 2012. Thus, refineries
which will begin the refining of mineral
oil after March 31, 2012 are not eligible
for tax holiday.
It was expected that the sunset clause will
be extended so that the refineries which
will begin the refining of mineral oil after
March 31, 2012 will also be eligible for
tax holiday.
Service Providers by a non-resident having a PE in India. A
corresponding amendment has also been
Clarification for applicability of
made in section 44DA to provide that
presumptive tax regime to O&G Service
Section 44BB shall not apply in respect of
Providers
the income referred to in section 44DA of
Section 44BB provides for presumptive the Act.
taxation of income earned by a non-
Considering that the services rendered
resident engaged in business of providing
by the oil and gas service providers do
services or facilities in connection with,
not fall within the definition of FTS as
of supplying plant and machinery on hire
provided under Section 9(1)(vii) of the
used or to be used, in the prospecting
Act, the amendment shall result in
for, or extraction or production of,
unnecessary litigation with the
mineral oil. Such income is taxable at
tax authorities.
10% of the gross sum paid or payable to
such non-resident. The intention behind the presumptive
taxation scheme was to simplify the
Section 44DA separately provides that fee
determination of income of the non-
for technical services (FTS) or royalty
resident, providing services or facilities to
income earned by a non-resident having
oil and gas sector. This rationale still
a Permanent Establishment (PE) in
holds good.
India shall be taxable on net income
basis at 40%. Accordingly, a clarification was expected
to the effect that the instruction # 1862
The definition of FTS as provided under
will continue to apply to all services
the Act categorically excludes the
rendered in connection with the
consideration for any mining or like
prospecting for, or extraction or
project. Instruction No. 1862 issued by
production of, mineral oil so that the
the Central Board of Direct Taxes on
benefit of presumptive taxation be
October 22, 1990 provides that the
continued to be made available to such
expression ‘mining project’ or ‘like project’
service providers.
would cover the services rendered for
exploration or exploitation of oil and
natural gas. Thus, consideration for such
services will not be treated as FTS under
section 9(1)(vii) and payment will be
taxed under section 44BB of the Act.
The scheme of presumptive taxation
under Section 44BB has been amended by
Finance Act 2010 to exclude the income
referred to in section 44DA (i.e. royalty or
fees for technical services (FTS)) earned
India Union Budget 2011: Implication on Oil & Gas Industry 21
Indirect Tax
Customs
Exemption from customs duty to crude oil
In Budget 2010, customs duty @5% on
crude oil was imposed. This was done
hoping that the prices of crude oil will
fall. However, the average price of crude
oil which was around $82 per barrel in
2008-09 has gone up substantially in the
current year and is further expected to
increase in 2011-12. In this scenario,
impact of customs duty on crude oil will
further escalate the cost of crude oil. Most
other countries do not levy any duty on
crude oil to keep prices of petroleum
products low. Removal of duty on crude
oil would reduce under recovery on
petroleum products. By abolition of duty
on crude oil, Government would have
lesser subsidies to meet.
Removal of National Calamity Contingent
Duty on Crude Oil levied at Rs.50/MT
The National Calamity Contingent Duty
(NCCD) of Rs.50 per metric tonne was
imposed on domestic and imported crude
oil, amongst various other goods, in the
Union Budget for 2003-04 in order to
augment the fund available with the
Government to provide support to the
relief work in the areas affected by
natural calamity. This results in stranded
cost to the refining sector and is therefore
expected to be abolished.
22 PwC
Excise Liability of interest where Cenvat credit
has been wrongly availed but reversed by
CENVAT credit on cement and steel
assessee before utilization
articles
The CBEC vide Circular No 897/2009
In the Union Budget for the year 2009-10,
dated September 3, 2009 has clarified
the definition of “inputs” as contained
that interest shall be recoverable in cases
under the Cenvat Credit Rules, 2004
where CENVAT credit has been wrongly
(“CCR”) was amended by inserting an
taken even if it has not been utilized.
explanation to exclude cement, angles,
Basis this department is issuing notices
channels, CTD bar, TMT bar, and other
demanding interest on CENVAT credit
items used for construction of Factory
wrongly availed even though unutilized.
Shed, Building or laying foundation or
making of structures for support of capital As wrong availment of CENVAT credit by
goods, from the definition of ‘inputs’. itself does not create any liability for
payment of excise duty, interest should be
The purpose of Cenvat scheme is to give
leviable only when the wrongly availed
credit of input tax so as to remove the
CENVAT credit has been utilised for
cascading effect of taxes. This is more
payment of the duty. Consequently, Rule
pertinent, given that now we are moving
14 of the CENVAT Credit Rules, 2004
towards GST regime. In such a scenario,
should be amended to clearly distinguish
restricting input tax credit on certain
that interest should be payable on
items such as steel and cement defeats the
wrongful availment and utilization of
purpose and goes against the grain and
CENVAT credit and not only on wrong
principle of Cenvat Credit Scheme. In
availment of CENVAT credit.
light of this, the said explanation inserted
in the definition of inputs should be
deleted.
Sales Tax / Value Added Tax(VAT)
VAT on Petroleum Products
Petroleum products are being subject to
single point levy of tax on sale at a very
high rate (20 per cent to 35 per cent) even
post the implementation of VAT in India.
Tax is being levied at first point in most
States and no VAT credit is available on
the sale/purchase of petroleum
products leading to distortion in the tax
credit chain.
In view of the intention of the
Government to implement Goods and
Services Tax (GST) in the year 2011-2012,
it is important that the Government, as a
step towards GST, brings all items under
the ambit of the VAT regime. It is,
therefore, recommended, that petrol and
petroleum products are brought under the
VAT regime and taxed at multipoint, with
credits available for the tax paid on
purchase thereof. Considering that these
are items of mass consumption, the
Government may consider levying VAT on
these products at the revenue neutral rate
of 12.5 per cent. However, if this is not
feasible due to revenue constraints, the
Finance Ministry should make a request
to the Empowered Committee to ensure
that the variation in revenue neutral rate
(i.e. 12.5 per cent and the VAT rates in
case of diesel and petrol should not
exceed 3 per cent to 4 per cent.
‘Declared Goods’ Status to Natural Gas
and LNG under the Central Sales Tax Act,
1956
Post introduction of VAT in India, natural
gas have been classified at the revenue
neutral rate of 12.5 per cent under most
State VAT laws. Some States have also
kept natural gas out of the VAT regime
and are levying VAT at a high rate of
20 per cent.
Natural gas is an important source of
energy for fertilizer, petrochemicals,
power and several other industries.
Importance of natural gas is likely to
increase in the coming years due to rise in
domestic use in the coming years.
However, the high and multiple point
sales tax structure on natural gas, without
input credits is adversely affecting the
consumers, the trade in natural gas and
the Indian economy as a whole.
Therefore, suitable relief in sales tax is
urgently required, not only to ensure that
cost of gas to the end consumer is kept
low but to also facilitate development of
associated infrastructure.
It may be mentioned that natural gas is a
primary energy source. As of now, the
other primary energy sources like coal
and crude oil are declared as ‘goods of
special importance in Inter-State trade or
commence u/s 14 of the Central Sales Tax
Act, 1956. Natural gas, therefore,
notwithstanding its environmentally
benign nature, becomes costlier and
non-competitive with such other fuels. In
order to provide a level playing field
amongst different primary energy
sources, natural gas including R- LNG
should be accorded the “Declared
Goods” status under the Central Sales
Tax Act, 1956.
The tax rates on natural gas at par with
coal and crude oil was expected,
particularly since natural gas is used in
production of goods used by the
common-man, like electricity, fertilizers,
auto and domestic fuels. This will help in
rational and economic choice of fuels by
the consumers.
Service Tax
Exemption from Service Tax on Services
Consumed by E&P Companies in relation
to Exploration and Productions Activities
There has been a recurring demand of the
Oil and Gas sector to eliminate service tax
on services consumed by E&P companies.
However, service tax has been gradually
made applicable to more and more
services used in the upstream sector
thereby resulting in significant increase in
the costs of carrying out various E&P
activities. The beginning was made in the
year 2004 when survey and exploration
of mineral, oil and gas service was
introduced. Thereafter, in 2005, the
taxable category of site formation and
clearance, excavation and earthmoving
and demolition services was brought
within the ambit of service tax. And with
effect from June 1, 2007, the Government
brought ‘Mining Services’ i.e. services
provided in relation to mining of mineral,
oil or gas, under the service tax net. The
24 PwC
position even worsened in view of Alternatively, the possibility of refund of
extension of provisions of service tax to the service tax paid on input services
the installations, structures and vessels consumed by the E&P sector should also
in the continental shelf of India and be considered. However, it is recognized
the exclusive economic zones of India that the refund mechanism is not a
in 2009. convenient procedure.
As a result, service tax now
comprehensively covers the upstream Amendment in Rule 6(6) of CCR to
sector. Most of these E&P services are extend the benefit to exempt services in
generally outsourced by E&P companies addition to exempt goods
to third party service providers. Further,
Sub rule 6 of Rule 6 provides that a
there is no output CENVAT/service tax
manufacturer of goods need not reverse
liability with regard to the crude oil and
the CENVAT credit where the goods are
natural gas production activities of the
cleared to specified categories like SEZ,
upstream sector. This has resulted in
EOU, etc. Similar benefit should be
break in the credit chain which eventually
extended to services provided to these
results in substantial increase in operating
specified categories so that there is no
costs for exploration companies. Hence,
requirement to reverse the credit in case
service tax paid on procurement of
of services provided to these units.
taxable services by E&P companies end
up as a sticking cost.
In view of the above, it is expected that
the Central Government, in line with
other concessions would exempt services
consumed by the E&P sector.
Goods and Services Tax(GST) 13th Finance Commission has Thus, to avoid the breakage in the tax
recommended inclusion of petroleum chain and overall growth of Oil and Gas
Inclusion of Petroleum Products in
products under GST. Sector, it is suggested that all the
GST regime
Petroleum products should not be kept petroleum products should be brought
The draft proposal circulated by the into GST regime and if they have to be
out of GST in the proposed constitutional
Ministry of Finance to the State excluded from the GST at this stage, it
amendment since any change in future to
Government proposes to keep petroleum may be done through an appropriate
bring the same under GST will need the
products such as crude oil, MS, HSD, ATD provision in the GST legislation instead of
Constitution to be again amended.
and natural gas permanently outside GST excluding them through the constitutional
Further, the partial implementation of
through a constitutional amendment. It is amendment bill.
GST for some petroleum products will
proposed that the taxation of these goods
push up costs for the sector as States
would continue as provided under the
would levy service tax under the new
existing scheme of taxation. This would
regime and input credit will not be
lead to inefficiencies and would lead to
available by the sector
tax cascading.
Several countries like Australia, Canada,
Sri Lanka, Singapore and Brazil have
included petroleum products in GST. The
 Significant
Policy
Changes and
Initiatives in
Oil & Gas
Industry

26 PwC
Significant policy changes relating to
the oil & gas industry were affected by
the Government of India in the Financial
Year 2010-11. Cited below are also
some key initiatives and developments
amongst them.
Upstream
Domestic Production
The year saw consolidation and increase
in production of crude oil and natural gas
after two major discoveries were put on
production last year which included gas
production from RIL’s KG D-6 field and
crude oil production from the Cairn’s
Barmer field.
Crude oil production which was
stagnating around 33 MMT is expected to
be higher by over 10 per cent. Natural gas
production, which used to be around 80
MMSCMD, is targeted to increase to
about 140 MMSCMD.
NELP
In order to intensify efforts of exploration
of hydrocarbon in the country as many as
31 exploration blocks were awarded
under the Eighth Round of New
Exploration Licensing Policy (NELP VIII)
with the signing of Production Sharing
Contracts (PSC) on June 30, 2010.
Similarly, 7 blocks were awarded for
exploitation and production of coal bed
methane in July 2010. Buoyed by the
success of NELP rounds with 87
discoveries so far, Government has
further offered 34 blocks on October 15,
2010 under NELP IX.
Rig holiday in deepwater blocks
The Government approved the grant of
drilling moratorium of three (03) years to
all deepwater block Production Sharing
Contracts (PSCs) signed under various
rounds of exploration till the NELP V
where drilling commitments are pending
as on January 01, 2009. The main
objective of the drilling moratorium
dispensation was to enable Contractors to
meet the drilling commitments under
various PSCs, which have been adversely
affected on account of world-wide
shortage in availability of deepwater rigs
since 2007 due to the then prevailing
high crude oil prices.
National Data Repository (NDR)
Action has been initiated to establish the
National Data Repository (NDR), which is
a pre-requisite for formulation of Open
Acreage Licensing Policy (OALP). The
Government has not yet notified OALP.
Oil diplomacy in higher gear
In order to achieve the objective of oil
security, the Ministry of Petroleum and
Natural Gas (MoPNG) engaged several
countries/fora in bilateral/multi-lateral
talks. These include attending/holding
international meets like International
Energy Forum meet at Cancun, Mexico in
March, 2010, Petrotech 2010 in Delhi, 4th
ASEAN Energy Ministers Summit at
Dalat, Vietnam. Indian delegations also
had bilateral talks with various other oil
rich countries including Angola, Canada
Iran, Mexico, Nigeria, Russia, Sudan,
Turkmenistan, Venezuela, etc.
Major successes in the oil diplomacy
include signing of an agreement between
national oil company of Venezuela
(PDVSA) and a consortium of Indian oil
PSUs comprising ONGC Videsh Ltd.
(OVL), IOC and Oil India Ltd. (OIL) ONGC
Videsh Ltd (OVL) for development of
Project 1 in oil rich Carabobo basin in the
month of May 2010. The Ministry also
signed inter-governmental agreements
with US, Russia and Angola for enhancing
cooperation in the oil and gas sector.
India Union Budget 2011: Implication on Oil & Gas Industry
Natural Gas
Natural Gas Infrastructure in India
The Government notified Section 16 of
the Petroleum and Natural Gas
Regulatory Board Act, 2006. Section 16
empowers the Petroleum and Natural Gas
Regulatory Board to authorize companies
to lay, build, operate and expand natural
gas pipelines and City Gas Distribution
networks in India.
Bids were invited by PNGRB for three
(03) pipelines viz Mallavaram-Bhilwara
Pipeline, Mehsana-Bathinda Pipeline and
Bathinda-Srinagar Pipeline. The GSPC-
IOC-BPCL-HPCL consortium emerged as
winner for all the three pipelines. PNGRB
is yet to issue formal authorisation in
absence of the Supreme Court’s decision
on its authority to do so. PNGRB has
now invited bids for the Surat-Pardip
Pipeline project.
The City Gas Distribution projects to
supply Piped Natural Gas (PNG) and
Compressed Natural Gas (CNG) are also
being encouraged with an aim to extend
the coverage to more than 200 cities from
current 19 cities. PNGRB concluded the
Third Round of bidding for eight (08)
cities/Geographical Areas on February 18,
2010. The Fourth Round is under progress
with another eight (08) cities/
Geographical Areas being offered by
PNGRB.
Augmenting supply of natural gas
The supply of natural gas, a preferred fuel
and feedstock for industries, has been
augmented substantially. Besides
domestic production, the options of
trans-border imports were pursued. In
order to augment long-term supply of
natural gas in the country an inter-
governmental agreement was signed at
Ashgabat for implementation of
Turkmenistan-Afghanistan-Pakistan-India
(TAPI) pipeline in the month of December
2010. The Iran-Pakistan-India (IPI)
pipeline project is also under
consideration/discussion for sourcing
natural gas.
27
Revision of APM price of natural gas
The price of gas under the Administered
Price Mechanism (APM) was increased
from the present level of INR 3,200/
MSCM to INR 6,818/MSCM. For
customers in the North-East, 40 per cent
of the price would be provided as subsidy
by Government. The price of natural gas
produced ONGC and Oil India Ltd. (OIL)
from their nomination blocks is sold at
Administered Price Mechanism (APM)
price. This price was last revised in the
year 2005.
Shale Gas
A Memorandum of Understanding (MoU)
on Shale Gas resources between India
and USA was signed during the India visit
of the President of America. Main
objectives of the MoU include Shale Gas
resource assessment in India, technical
studies to commence on Shale Gas
exploration in India and training of
Indian personnel in the area of Shale Gas.
Government has initiated actions to
formulate a policy on Shale Gas. Detailed
studies are being taken up to identify the
prospective basins/areas and estimation
of Shale Gas resources in the country. As
a part of R&D project, a shale gas well in
Raniganj basin (RNSG-I) has been
spudded by ONGC and drilling is
in progress.
Downstream
Introduction of BS-IV/III petrol and diesel
Bharat Stage-IV (BS-IV) petrol and diesel
were mandated in 13 major cities and
Bharat Stage (BS-III) petrol and diesel in
the entire country. Whereas introduction
of BS–IV petrol and diesel was completed
on single day i.e. on April 01, 2010, in 13
major cities, the supply of BS-III petrol
and diesel was fully implemented by
September 22, 2010 in the rest of the
country ahead of the deadline of October
01, 2010. All the public sector oil
companies invested an amount of about
INR 32,000 crore in the fuel upgradation
projects to achieve this milestone.
28 PwC
Maintaining surplus refining capacity
The refining capacity in the country has
been augmented to 186 MMTPA, which is
well above the annual demand of about
138 MMTPA. Export of petroleum
products (POL) is the single largest (17.6
per cent) merchandise export from India.
The new refineries at Bhatinda, Paradip
and Bina would further augment the
domestic refinery capacity making India
as major refinery hub is South Asia.
LPG to rural households-Dealer selection
made transparent
To provide clean cooking fuel in rural
areas and to achieve 75 per cent
population coverage, with domestic LPG,
Rajeev Gandhi Rural LPG Vitrak Yojna
was formally launched at Laxmangarh,
Rajasthan in March 2010 for setting up
small size LPG Distribution agencies in
rural areas. To mark transparency in
distributor selection, draw of lots held to
select the distributors under the scheme.
The Oil Marketing Companies (OMCs)
plan to open LPG agencies in 2,239
locations under this scheme, 49 RGGLVs
have already been commissioned. This
will greatly improve the cooking
conditions in the kitchens of rural
house-holds. The scheme will also provide
new employment opportunities for the
rural population leading to overall
economic prosperity.
The Ministry of P&NG has also approved
a more transparent selection procedure
through draw of lots for all the LPG
Distributors in the country.
Initiatives for better services & delivery
of right quality and quantity
The Government introduced an
innovative scheme for LPG consumers to
be able to take delivery of the cylinders as
per their desired time. The scheme has
been launched in major cities initially
including Delhi and surrounding towns
and is being expanded to other cities.
MoPNG also signed a MoU on July 30,
2010 with UIDAI with a view to better
targeting of subsidized products like LPG
and kerosene and avoid diversion of the
products as well as improve customer
services in the country.
Equitable burden-sharing marks
pricing reforms
Keeping in view India’s high dependence
on crude oil imports, the volatile crude oil
prices and also the recommendations of a
High Powered Kirit Parikh Committee,
the Empowered Group of Ministers
(EGOM) decided to deregulate petrol
prices in June 2010. An in-principle
decision was taken for de-regulation of
diesel prices along with marginal hikes in
LPG and SKO prices. The Government
and PSUs continued to shoulder the major
part of the burden of higher under-
recoveries during 2010-11, estimated
around INR 70,000 crore against about
INR 46,000 crore in 2009-10.
Promoting Ethanol blending with petrol
The Ethanol Blended Petrol (EBP)
programme earlier launched by the
Government could not sustain owing to
non-availability of ethanol in required
quantity and other state specific issues.
Later, to give fillip to the programme,
Government gave fresh relook and
decided on August 16, 2010 to implement
the EBP programme to the extent of the
ethanol made available by the domestic
ethanol producers at the ex-factory
declared price decided by the
Government.
As per the Government decision, after
ascertaining the actual availability of
ethanol in the country, per centage of
blend from 0-10 per cent would be
recommended area-wise by the working
group of officers constituted for the
purpose. Government fixed provisional
price of ethanol at INR 27 per litre. The
programme was re-launched in
November, 2010 after fresh tenders issued
by the OMCs for sourcing ethanol.
General
Supreme Court ruling on KG D-6 Gas
In a major development during the year
the Hon’ble Supreme Court in May, 2010
upheld Government’s decisions and
jurisdiction in respect of the pricing and
allocation of the natural gas discovered in
KG D-6 field. The Supreme Court ruled
that PSC is supreme and the natural
resources belong to the Government. The
decision vindicated the position taken by
the government and allocations made by
the EGOM constituted by the Government
for the purpose.
Change of guard
Shri S. Jaipal Reddy assumed the charge
as the Minister of Petroleum and Natural
Gas. He was earlier Minister of Urban
Development in the present Government.
The charge of Minister of State of
Petroleum and Natural Gas was assumed
by Shri R P N Singh.
Shri A.K. Hazarika, Director (Onshore),
ONGC, has been entrusted the additional
charge of the post of Chairman and
Managing Director, ONGC on an ad-hoc
basis for a period of three months with
effect from February 01, 2011. Shri S.V.
Narsimhan, Director (Finance) IOCL has
been entrusted the additional charge of
the post o f Chairman, IOCL on an ad-hoc
basis for a period of three months with
effect from February 01, 2011.

Disinvestment
The Government had approved
divestment of 10 per cent of the shares
held by the President of India in
Engineers India Limited (EIL). A total of
33,693,660 equity shares of INR 5 each
were on offer in the ‘Further Public Offer’
(FPO).
The response to the FPO was
overwhelming. In the category of
Qualified Institutional Buyers (QIBs), the
issue was oversubscribed by 23.4 times, in
respect of Non-Institutional Buyers
(NIBs), it was oversubscribed 5.9 times
and in case of retail buyers, it was
oversubscribed by 3 times. Overall the
issue was oversubscribed by 13.4 times.

India Union Budget 2011: Implication on Oil & Gas Industry 29

Commodity
Balance of
Petroleum &
Petroleum
Products

30 PwC
 (Million Tonnes)

2010-11
Item 1980-81 1990-91 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 (Apr.-
Nov.)

1 2 3 5 6 7 8 9 10 11 12 13

I. Crude Oil

1 Refinery Throughput 25.8 51.8 112.6 121.8 127.4 130.1 146.6 156.1 160.8 160.0 106.5

2 Domestic Production 10.5 33.0 33.0 33.4 34.0 32.2 34.0 34.1 33.5 33.7 24.8

(a) On-shore 5.5 11.8 11.5 11.5 11.6 11.4 11.3 11.2 11.3 11.8 10.6

(b) Off-shore 5.0 21.2 21.5 21.9 22.4 20.8 22.7 22.9 22.2 21.9 14.2

3 Imports 16.2 20.7 82.0 90.4 95.9 99.4 111.5 121.7 132.8 153.3 101.5

4 Exports — — — — — — — — — — —

5 Net Imports ( 3-4) 16.2 20.7 82.0 90.4 95.9 99.4 111.5 121.7 132.8 153.3 101.5

II. Petroleum Products

Domestic Consumption
1 30.9 55.0 104.1 107.8 111.6 113.2 120.7 128.9 133.4 138.2 92.4
@ of which

(a) Naphtha 2.3 3.4 12.0 11.9 14.0 12.2 13.9 13.3 13.9 10.2 7.2

(b) Kerosene 4.2 8.4 10.4 10.2 9.4 9.5 9.5 9.4 9.3 9.3 6

(c) High Speed Diesel Oil 10.3 21.1 36.6 37.1 39.7 40.2 42.9 47.7 51.7 56.3 39.1

(d) Fuel Oils 7.5 9.0 12.7 12.9 13.5 12.8 12.6 12.7 12.4 11.6 7.3

Domestic Production $
2 24.1 48.6 104.1 113.5 116.6 119.8 135.3 144.9 150.5 149.7 107.7
of which

(a) Naphtha 2.1 4.9 9.7 11.3 14.1 14.5 16.7 16.4 14.8 14.8 10.7

(b) Kerosene 2.4 5.5 10.0 10.2 9.3 9.1 8.5 7.8 8.2 8.5 4.9

(c) High Speed Diesel Oil 7.4 17.2 40.2 43.3 45.9 47.6 53.5 58.4 62.9 61.1 44

(d) Fuel Oils 6.1 9.4 12.2 13.4 15.0 14.3 15.7 15.8 17.7 17.5 12.86

3 Imports 7.3 8.7 7.2 8.0 8.8 13.4 17.7 22.5 18.5 14.7 11.5

4 Exports Neg. 2.7 10.2 14.6 18.2 23.5 33.6 40.8 38.9 46.0 21.7

5 Net Imports ( 3-4) 7.3 6.0 -3.0 -6.6 -9.4 -10.1 -15.9 -18.3 -20.4 -31.3 -10.2

Source: Ministry of Petroleum & Natural Gas

@ Excluding refinery fuel consumption, including imports by private parties

$ Excludes LPG production from fractionators
Neg Negligible

India Union Budget 2011: Implication on Oil & Gas Industry 31

 Item Unit 2007-08 2008-09 2009-10

i Crude oil MT 725 770 775 -

Reserves (Balance Recoverable)
ii Natural gas BCM 1055 1050 1074 -
i Crude oil MT 34.117 33.5 33.7 24.8
Production
ii Petroleum products MT 144.93 150.5 149.7 107.7
i Crude oil MT 155.8 166.3 187 126.3
Consumption
ii Petroleum products MT 128.95 133.4 138.2 92.4
Refinery installed capacity MT 132.47 148.97 177.97 185.4
i Public sector MT 112.54 112.22 93.4 74.14
Refinery Production (Throughput) ii Private sector MT 43.56 48.55 39.855 32.38
Total MT 156.103 160.8 133.255 106.52
i Gross production BCM 32.402 32.85 38.486 35.291
Natural Gas
ii Utilization BCM 31.478 31.77 33.67 31.228

Source: 1. Ministry of petroleum and Natural Gas

2. PPAC
3. Economic survey 2009-10

32 PwC
Abbreviations

AED - Additional Excise Duty MAT - Minimum Alternate Tax

APM - Administered Price Mechanism MMBTU - Million British Thermal Units
ATF - Aviation Turbine Fuel MMSCMD - Million Metric Standard Cubic Meter Per Day
bbl - A Barrel MMTPA - Million Metric Tonnes Per Annum
BCM - Billion Cubic Meters MoP&NG - Ministry of Petroleum and Natural Gas
BE - Budget Estimate MT/MMT - Metric Tonnes/ Million Metric Tonnes
BED - Basic Excise Duty NCCD - National Calamity Contingent Duty
CBM - Coal Bed Methane NCERT - National Council of Eduction Research and Training
CCR - CENVAT Credit Rules NELP - New Exploration Licensing Policy
CENVAT - Central Value Added Tax NGHP - National Gas Hydrate Programme
CTD Bar - Cold Twisted Bar NTPC - National Thermal Power Corporation
CNG - Compressed Natural Gas OISD - Oil Industry Safety Directorate
E&P - Exploration and Production OMC - Oil Marketing Companies
EOU - Export Oriented Unit PDS - Public Distribution Scheme
FC - Finance Commission PFCE - Private Final Consumption Expenditure
FCI - Fertilizer Corporation of India PNG - Piped Natural Gas
FRBM Act - Fiscal Responsibility and Budget PNGRB - Petroleum and Natural Gas Regulatory Board
Management Act, 2003 POL - Petroleum Oil & Lubricants
GAIL - Gas Authority of India Limited PSC - Production Sharing Contract
GDP - Gross Domestic Product RIL - Reliance Industries Limited
GoI - Government of India RLNG - Regasified Liquid Natural Gas
GSPA - Gas Sale Purchase Agreement SAED - Special Additional Excise Duty
GST - Goods and Service Tax SEZ - Special Economic Zone
HSD - High Speed Diesel SKO (PDS) - Super Kerosene Oil supplied through Public
EGoM - Empowered Group of Ministers Distribution System
HSE - Health Safety Environment TMT - Thermo Mechanically Treated
IOR/EOR - Improved Oil Recovery/ Enhanced Oil Recovery UCG - Underground Coal Gasification
LNG - Liquefied Natural Gas UIDAI - Unique Identification Authority of India
LPG - Liquefied Petroleum Gas VAT - Value Added Tax
LPG (DOM) - Liquefied Petroleum Gas for Domestic supply WPI - Wholesale Price Index
LSHS - Low Sulphur Heavy Stock

India Union Budget 2011: Implication on Oil & Gas Industry 33

About PetroFed
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Contact
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