The petroleum ministry has urged the finance ministry to withdraw service tax on core activities of exploration and production companies.
The ministry has warned that additional service tax would erode the resource base of exploration and production (E&P) companies, thereby affecting the exploration and resultant reserve accretion and production of oil and natural gas in the country in the long run.
The imposition of service tax will also aggravate problems of state-owned oil exploration companies — Oil and Natural Gas Corporation and Oil India Ltd. Oil companies are already burdened with subsidies provided to oil marketing companies on account of under-recoveries. The strengthening of the rupee against the dollar is adversely affecting sales and realisation of these companies owing to linkages of crude and value-added products in US dollars, the ministry has said.
The issue was initially raised by the petroleum ministry when proposals for Budget 2007-08 were sought by the finance ministry. However, in the Finance Act, 2007, service tax has been levied on services provided in relation to mining of mineral, oil or gas. As a result, various services received by E&P companies were comprehensively brought under the purview of service tax.
In a letter to the finance ministry, the petroleum ministry has pointed out: “Exploration of oil and gas is a high-risk capital intensive venture. In the E&P industry, even though the inputs are deterministic, the output is probabilistic and success rate is very low. An additional burden by way of incremental tax will be a disincentive for prospective investments in this sector. Such a measure clearly goes against the government’s declared objective of attracting investment in the E&P sector.”
The problem is aggravated by the act that service tax on the E&P sector is presently not Cenvatable because the goods (crude oil and natural gas) are chargeable to “nil” excise duty. In such a scenario, a levy has a cascading effect.
Outlining objections to the levying of service tax on the E&P sector, Joint Secretary Prabh Das stated: “The government has committed itself to provide incentives and fiscal stability in the production sharing contracts signed for discovered fields and under the New Exploration Licensing Policy. While the E&P sector requires additional fiscal incentives, the levy of service tax becomes a regressive step for the industry, especially when the government already generates huge revenue from this sector.”