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Pipeline to profits
No tax bloc(k).
Raghuvir Srinivasan
It was a good Budget for the oil and gas sector but it would have been even better if only the Finance Minister had also unveiled a clear plan to deregulate petroleum product pricing. Even so, the industry has been gifted two major proposals that will help it save on taxes significantly.
The investment-linked tax incentive under a new section 35AD proposes 100 per cent deduction of capital expenditure (excluding on land) on laying and operation of cross-country natural gas, crude oil and petroleum product pipelines, including storage facilities. Interestingly, the benefit has been given with retrospective effect for pipelines built after April 1, 2007. The one big cross-country pipeline that has been commissioned in the last one year is the east-west pipeline of Reliance Industries that transports gas from Kakinada on the east coast to Maharashtra and Gujarat.
Advantage Reliance
Reliance can now deduct the capital expenditure that it incurred on the pipeline from its total income, including the value already capitalised in its books. There could be others such as Gujarat State Petronet and Gail (India) that may benefit from this new deduction but the biggest beneficiary will be Reliance Industries.
The Finance Minister has simultaneously discontinued the profit-linked deduction under section 80-IA that is now available to those setting up gas pipelines. Those companies now availing benefits under this section will now shift to the investment-linked deduction under section 35AD. The grey area here is what happens to those companies that commissioned their pipelines before April 1, 2007 because the new section 35AD is applicable only to those pipeline projects executed after the above date.
Clarification on tax holiday
The second major proposal is the clarification on extension of tax holiday to natural gas producers. Presently, crude oil producers and refiners enjoy a seven-year tax holiday on earnings from their projects. Now, gas producers such as Reliance Industries, and GSPC and ONGC, when they begin production from their KG-Basin finds, will also benefit.
The disappointment though was that the much anticipated plan for deregulation for petroleum product pricing was not announced. Mr Mukherjee has adopted the classic “put on the backburner” strategy by referring the issue to an expert group that will be constituted. We have had enough such groups headed by luminaries such as Dr C. Rangarajan and Mr B. K. Chaturvedi, that came up with excellent reports in the last two years and which are now gathering dust.
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