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Updated: February 17, 2010 20:13 IST

Will Budget buoy natural gas?

D. Murali
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Nabin Ballodia, Director, KPMG
Special Arrangement Nabin Ballodia, Director, KPMG

With green shoots of economic recovery and the upcoming Union Budget, the Government has to do a balancing act between of existing subsidies and withdrawal of stimulus, notes Nabin Ballodia, Director, KPMG. One area which is under the lens constantly and being watched closely is the fuel price, he adds, during the course of a recent pre-Budget email interaction with Business Line.

Keeping in view the projected trajectory of economic growth, and the huge requirement and the advantages of natural gas, the Government should re-look at the tax structure and incentives for natural gas in the forthcoming Budget so that the overall burden on the common man can be rationalised, he argues.

“We need measures that are likely to bring greater clarity in the tax regime for natural gas and impact the overall prices of natural gas.”

Excerpts from the interview

On gas, as the alternative energy source

With the swelling losses of the oil marketing companies, the sword of fuel price hike has been hanging on the common man. The problem is further compounded by the volatile global crude prices – and the brunt is often borne by the common citizen. Though the deferment of decision on fuel price hike by the Government would have come as some relief – it may not be a reason to cheer in the long run.

When the Government looks at long-term solutions to the energy issue, a possible option may be usage of alternative source of energy such as natural gas. This source of energy is not only cheaper but also environment-friendly and low on emissions.

Usefulness of this energy source as motor fuel has been demonstrated by reduction of chronic vehicular pollution in all the cities where it has been used. It could be an able substitute not only as motor fuel but also for electricity, cooking gas (through city gas distribution), fertiliser and a catena of other requirements of a common man.

At present, the per capita consumption of natural gas in India is almost 5 per cent of the global average which stands at 538 cu m. As the existing usage of natural gas in India is limited, this source of energy could play an important role in shaping the nation’s future.

On the need to encourage investments in the sector

As a long-term solution and to ensure uninterrupted supply of natural gas at affordable prices to consumers, the Government needs to create a congenial environment for investment into the sector.

There is a need to provide adequate incentives and encourage key players to participate in exploration and production (E&P) of natural gas to augment the domestic supply. One such initiative could be tax incentives and benefits available to E&P players.

On tax holiday

Under the existing tax regime, companies engaged in production of mineral oil are entitled to a 7-year income-tax holiday. However, there has been some difference of opinion on the availability of tax holiday for companies producing natural gas.

The Finance Act, 2009 specifically provided for a 7-year income-tax holiday for natural gas produced from the blocks allotted under the 8th round of New Exploration Licensing Policy (NELP). This specific provision has created further haze around availability of tax holiday for gas produced from blocks allotted under earlier rounds of NELP as well as pre-NELP blocks – which may act as a serious impediment on the availability and prices of natural gas in the future.

On the burden of indirect taxes

From an indirect tax perspective, natural gas is currently subjected to sales tax. It has been a long-standing demand of the industry to classify natural gas as “declared goods” so as to be eligible for a concessional rate of sale tax. This situation is likely to get complicated with the advent of GST (Goods and Services Tax) – which is primarily a consumption-based tax.

Further, as India relies heavily on import of its petroleum requirement, the industry has been canvassing for exempting LNG (liquefied natural gas) from custom (import) duty. However, these demands of the sector are yet to be addressed and need attention in the upcoming Budget.

***

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