Tax holiday withdrawal proposal in Budget

A 2008-09 Budget proposal may compel ONGC to review its proposed new refinery investments. The Budget proposal stipulates withdrawal of tax holiday for such projects being commissioned after April 1, 2009.
Speaking to newspersons at the sidelines of an Oil and Gas Summit 2008 here on Wednesday, Chairman and Managing Director, ONGC, R.S. Sharma said, “This proposal raises a major question mark and I have asked my people to work out the financial implications.
We don’t want to carry on with uncertainties.” ONGC is planning to set up a new refinery in Kakinada, Andhra Pradesh, and another in Rajasthan, and a project in Mangalore. ONGC had planned to set up a 15-million-tonne greenfield refinery at Kakinada and had also planned to expand capacity of the Mangalore refinery to 30 million tonnes. “After the withdrawal of the seven-year income tax holiday, the projects would be reviewed,” he said.
Proposal The Budget for 2008-09 has proposed withdrawing the income tax holiday for refineries being commissioned after April 1 2009. “When there was a conscious decision to make India a refining hub, this withdrawal of tax incentive will not only impact projects but will also be a negative sentiment for the sector,” he said. Sharma said the memorandum notes on the Budget proposals have also raised question marks on oil and gas field development projects getting the seven-year tax holiday with a sub-section defining mineral oil for the purpose of tax incentives does not include petroleum and natural gas. “This would make the risky E&P business less lucrative,” Sharma said. He hoped that this is an inadvertent aberration which would be set right before the passing of the Finance Bill. ONGC has firmed up $12 billion of investment for developing the oil and gas fields found off the east-coast and also those on the west-coast. “The rate of return would come down if such a proposal is implemented,” Sharma said. However, the production sharing contracts already signed should not be impacted by a note in the memorandum for the tax proposal, he said.
“Whatever agreements have been signed cannot be changed. They are sacrosanct,” he said. ONGC and other exploration companies like Reliance Industries Ltd had entered into a production sharing contract with the Government for various E&P blocks with a clear provision for a seven-year tax holiday.