The oil and gas exploration and production business is likely to get a boost following a proposal to exempt the profit petroleum paid to the Centre from the Goods and Services Tax (GST).
The production sharing contracts (PSCs) signed for exploration and development of oil fields require operators to pay a pre-determined share of the surplus petroleum output to the Centre as a form of royalty. Currently, such profit petroleum is subject to GST as it has been construed as a payment made by firms for a service.
Though profit petroleum is legally taxable, the levy of GST doesn’t appear to be in sync with the PSCs signed under the New Exploration Licensing Policy or NELP, said officials aware of the development, adding that the proposal to rectify this is likely to be taken up by the GST Council at its next meeting in September.
‘Implicit cost’
“The PSC allows contractors to recover all expenses incurred in exploration, development, production and this includes costs of all inputs and indirect taxes paid thereon (except corporate income tax). If profit petroleum is a consideration paid to the government for the right to explore, it is also an implicit cost,” said an official, who spoke on the condition of anonymity.
However, operators are not allowed to recover the profit petroleum paid to the government as a cost under the PSC. Moreover, if GST is to be levied on the government’s share of profit petroleum, disputes could arise on whether the contractor can pay the GST out of his own profit petroleum.
Industry bodies such as CII had made several representations on the issue to the Centre, contending that paying a share in profit petroleum to the government is a profit-sharing arrangement rather than a payment for a service. While officials disputed this interpretation and said that the relationship between the government and contractors is of an assignor and assignee, they concede that the GST levy has the potential to lead to litigations and disputes.
“Profit petroleum in this context is the government’s share from exploration and production activity, so the question whether the explorer should be liable to pay tax on it or not has been deliberated for long,” said Anish De, partner and head (infrastructure) at KPMG India.
“This is not good for reducing India’s dependence on imported oil and gas. So, in order to quell the concerns of this strategically important sector, we have mooted that the GST Council consider exempting government’s share of profit petroleum from the tax,” the official said.
“Profit petroleum is a bidding parameter for players under the NELP regime and they are required to share varying amounts of the surplus oil drilled beyond a particular threshold with the government,” said K. Ravichandran, senior vice-president at ratings agency ICRA.
“To be required to pay GST on what in itself is a physical levy paid to the government is inequitable so any rationalisation on this front will bring relief to the sector,” said Mr. Ravichandran.
“In the overall scheme of NELP, treating government’s share in profit petroleum as a cost and levying GST appears odd,” the official said.
At the same time, the government is likely to clarify that ‘cost petroleum’ — which is the value of petroleum that a contractor can take in order to recover all contract costs for exploration and royalty incurred during a year — could be taxable.
“Cost petroleum is not a consideration for a service to the government and thus not taxable per se. However, it is a valid measure of mining service provided by an operator, which is taxable... especially where details of cash bills raised by the operator are not available with authorities,” said an official, adding that a clarification may be issued to make this clear.
Terming the proposed change in GST applicability on profit petroleum share as a strong signal for exploration and production players that it is serious about scaling up exploration business, Mr. De said the stance taken for existing NELP on the issue will also extend to the new HELP regime where a revenue-sharing arrangement is proposed.
