The petroleum ministry has raised with the finance ministry the issue of restricting the tax holiday provision for refineries to those that start refining activities before April 1, 2009. This is expected to have an adverse impact on state-owned refining and marketing companies, which have drawn up plans to set up refineries over the next five years.
Petroleum product exports targeted by the refining companies could also be jeopardised. At present, the oil sector accounts for 17.50 per cent of the exports of the country.
Hindustan Petroleum Corporation is setting up a 9 million tonne refinery at Bathinda, while Bharat Petroleum Corporation is working on a similar plant at Bina. Indian Oil Corporation has plans to set up a 15 million tonne refinery at Paradip alongwith a petrochemical complex.
The total investment proposed for refining in Eleventh Five Year Plan is expected to be Rs 81,545 crore and is expected to add 21.08 million tonnes of capacity with state-owned oil companies.
Section 80 1(B) (9) of the Income Tax Act provides 100 per cent deduction for seven years to an undertaking that begins commercial production or refining of mineral oil. “With the introduction of the proposed changes in the Budget for 2008-09, the tax holiday will stand withdrawn if refining of mineral oil begins after April 1, 2009. Moreover, the term mineral oil has been so defined that it does not include petroleum and natural gas, possibly denying the tax holiday to even the exploration and production sector,” petroleum ministry officials contend.
The petroleum ministry has expressed concern over the withdrawal of the tax holiday creating an imbalance within the sector. Less than half of projected 21 million tonne capacity is expected to be commissioned by the end of 2008, while the balance will be set up thereafter till 2012. “The state-owned oil companies have based their financial viability on the tax benefits. An abrupt withdrawal of these benefits will distort the market, creating an unfair advantage for those who commission refineries before April 1, 2009,” officials stated.