Significant downward movement of crude oil prices, and correction in long term contracted natural gas prices are crucial developments in 2015-16. From a policy standpoint, the launch of revenue sharing model , albeit on a pilot basis with respect to potential bidding out of sixty-nine marginal fields was indicative of the policy shift in licensing of hydrocarbon acreages from the extant profit sharing model. Besides, the falling natural gas prices – both in spot and long term trades, is expected to propel the natural gas market in India. The reduction in prices of renewable power underlines the new competitiveness of non-fossil fuel. This is of significance for non fossil fuel sources of energy to become mainstream and form the backbone of India’s commitment at the UN Climate Change Conference held in Paris in 2015. In this backdrop, investors in Indian energy sector do carry three broad set of expectations from the Union Budget 2016 – viz, to set out roadmap of crucial policy reforms, resolve regulatory concerns and address specific tax challenges. Key expectationsPolicy reforms
• Extension of the Uniform Licensing policy (ULP) which would allow licences, once awarded, to be extended to all fossil fuels sources, including oil and gas, shale gas and coal-bed methane. Presently, there are separate licensing regimes for oil and gas and coal-bed methane whereas no licensing regime exists for shale gas.
• Initiation of the 10th round of bidding of acreages under the prevailing New Exploration Licensing Policy (‘NELP’) or evolution of the Government’s policy towards an Open Acreage Licensing Policy (OALP) for Exploration & Production (‘E&P’) activities, wherein the bidding and award of acreages will be a continuous, demand-based process instead of cyclical bidding rounds launched under the NELP.
• Clear policy articulation to mitigate uncertainty that presently surrounds the proposed move away from profit sharing model to a full-scale shift towards revenue sharing model. While comments have been invited from stakeholders on the draft ‘New Fiscal and Contractual Regime for Award of Hydrocarbon Acreage’, absence of a clear policy from the Ministry of Petroleum & Natural Gas has led to speculative trend in investment decisions which take into account the proposed policy shift.
• In line with the deregulation carried out for petrol and diesel, there is a need for full price deregulation for other petroleum products (ie LPG and kerosene). This long standing issue had significantly impacted the financial health of the downstream industry.
• The government’s commitment to achieve 175 GW of installed capacity of renewable energy by 2022 requires revitalising the Renewable Energy Certificates (REC) market, allowing better market access to power producers.
• Policy reform roadmap to meet India’s commitments articulated at the 2015 UN Climate Change Conference for raising share of non-fossil fuel power to 40 percent by 2030.
• Determination of the framework for:
− Market-based gas pricing;
− Policy for fixation of tariff and escalations by Government distributorsDirect taxOil & Gas
• To clarify on the long standing demand of the upstream sector to extend income-tax incentives, especially in wake of Government’s roadmap to rationalize corporate tax rates and eliminate tax incentives. Most relevant demands of upstream sector as to income-tax incentive are:
− Tax holiday for oil & gas sector for all awarded Production Sharing Contracts under section 80-IB of the Income-tax Act, 1961 (‘Act’) for mineral oil including natural gas. Alternate approach to incentivize capital-intensive industry can be to extend ‘investment linked incentive’ for E&P activities.
− Exempt / rationalize levy of Minimum Alternate Tax (‘MAT’) for E&P activities; the present MAT rate of ~ 20 percent on ‘book profits’ acts as significant deterrent in overall investment decision-making for high-risk and capital intensive upstream operations.
− Accept decision of the Gujarat High Court in the case of Niko Resources Ltd vs Union of India to allow tax holiday in respect of natural gas under section 80-IB of the IT Act, by way of a suitable amendment / clarification.
− Remove the retrospective change in law introduced in 2012 with respect to all blocks licensed under a single contract, being treated as a single undertaking for the purpose of section 80-IB of the Act, and withdraw litigation on this aspect; Gujarat High Court in the case of Niko Resources Ltd (supra) has also held that the retrospective amendment is unconstitutional.
− Clarify that oil wells should be considered as ‘Plant & Machinery’ and not ‘Building’ for the purpose of claiming depreciation under the Act; the underlying rationale is that extant definition of ‘building’, even though includes tube-wells, cannot be extended to include specialised wells, such as oil wells which on account of their complex technical specification are operated as ‘plant’.
− Clarify that offshore platforms used for various oil exploration / extraction activities and other incidental activities such as providing accommodation should be classified as ‘Plant & Machinery’ for the purpose of claiming depreciation under the Act.
− Amend section 42(1) of the Act to provide for deduction of infructuous or abortive expenditure in the year of incurrence of expenditure without any condition of surrender as the existing requirement of surrendering the area for availing the deduction sometimes induce the exploration company to surrender the area without fully exploring the same.
− Clarify that all services which are in relation to E&P activities are to be eligible for deemed income taxation under section 44BB of the Act, without any distinction between whether services are undertaken by Tier I contractor or otherwise. In 2015, the Supreme Court upheld applicability of section 44BB of the Act to all services which are in relation to E&P activities. Explicit acceptance of the Supreme Court decision by the Government will bring to an end the frivolous tax litigation.Power & Renewables
• Roll out of geography-based tax incentives for renewable energy sources (solar parks, wind energy farms etc) similar to those for SEZs.
• Extend tax holiday benefit under section 80-IA of the Act for undertakings engaged in power generation or generation and distribution of renewable energy and their equipment manufacturing, to provide fillip to the Government’s flagship ‘Make in India’ programme.
• Exempt / rationalize levy of MAT for power generation business; the present MAT rate materially neutralizes the economic benefit of accelerated tax depreciation available to power business, especially in renewable sector.
• Introduce weighted deduction in respect of expenditure incurred in relation to energy efficient and carbon emission reduction technologies (resulting into earning of carbon credits) considering that such technologies are expensive. Indirect taxOil & Gas
• Services such as exploration of minerals, oil and gas, availed by the Energy sector may be included in negative list or an abatement may be provided. This would lower the burden of input taxes on such services owing to the inability of the sector to pass on the taxes further in the supply chain.
• Revise additional duties of excise on production of crude oil, such as National Calamity Contingent Duty of Excise (‘NCCD’) on indigenous crude oil and Oil Industry Development (‘OID’) Cess. The crude oil prices have plunged over the last couple of years but such duties / cesses have not been reduced or made ad valorem so that the duty is in line with fall in international crude oil prices.
• Reduce customs duty on import of LNG in view of the limited availability of LNG domestically. This would promote the use of LNG (a clean fuel) which could give a significant boost to the Energy sector in India.
• Levy of Clean Energy Cess on purchase of coal should not apply for industries who have adopted modern technologies to ensure a clean manufacturing process. Also, CENVAT credit of this cess on coal may be considered as an option. Power & Renewables
• Bring wind energy projects at par with solar energy projects by implementing the following:
− Excise exemption to specified equipment such as control gears, cables, transformers, transmission line / equipment, control equipment, etc.
− Zero rating the supplies made for a wind energy project for CENVAT credit purposes.
− Concessional rate of customs duty on import of all equipment for wind turbines. This would be an expansion of the existing list of equipment.
• Exemption for services used for wind operated electricity generator or refund of such service tax would be a welcome step to boost to the renewable energy industry.
• For the solar sector in India, the following incentives may be brought in:
− Exemption from customs duty and excise duty for energy storage batteries used in solar energy plants.
− Solar parks to be given the same status as that of SEZs.
− Setting up a sovereign fund to compensate state governments for providing exemption from levy of VAT on solar equipment.
− Higher incentives for export of Photovoltaic Cells (‘PV cells’) to more countries in order to promote the domestic manufacturing of PV cells under the ‘Make in India’ initiative.
• Considering the inability of the power generation sector to offset the service tax paid on input services against any output liability, service tax on such input services is an additional cost for the power generation sector. Service procurements by the power industry should be exempted in order remove such additional cost. Also, service tax exemption may be provided to companies providing power backup facilities in the renewable energy sector.
• Benefit of exemption to electricity transmission services as part of negative list of services, presently available to government approved entities only, should also be extended to their sub distributors and franchisees.
To conclude, expected roll out of the final roadmap for phasing out tax incentives, has created industry-wide anxiety. Whilst the draft proposal by Central Board of Direct Taxes (CBDT) proposes to withdraw most of the tax incentives available to Energy sector, such decision must weigh in the larger economic gains of extending tax incentives to critical sectors such as Energy. Further, alignment of concessions, exemptions and incentives under the indirect tax laws would pave way for smooth transition for the Energy sector into the proposed Goods and Services Tax (‘GST’) regime. Need of the hour is to encourage and promote cheaper fuel with the help of innovative technology, from both traditional as well as renewable sources, which may be difficult to achieve in absence of targeted fiscal support. It is in this endeavour, that the Union Budget 2016 could be a significant contribution towards stimulating pace of private investments in the energy sector.