• Higher than expected cess on crude oil

Currently Oil producers continued to pay the Cess rate of Rs 4,500 /mt when Crude prices were above $100/bbl. With fall in crude prices to around $30 a barrel level, the industry players were expecting the government to levy a 10% cess on ad-valorem basis instead of a fixed rate. However the Budget announced a 20% cess.

• Incentivising gas production from deep-water, ultra deep-water and high pressure-high temperature areas: The government on Monday said that a proposal is under consideration for new discoveries and areas which are yet to commence production, first, to provide calibrated marketing freedom; and second, to do so at a pre-determined ceiling price to be discovered on the principle of landed price of alternative fuels. 

• Gradual move towards a market-linked gas price regime a welcome step:

• As it would encourage domestic production of natural gas, and companies would expect to get higher premiums. The government would offer a premium on domestic natural gas prices to gas blocks that have already been discovered.

The Indian Strategic Petroleum Reserves Limited (ISPRL) is in the process of setting up underground storage facility for storage of crude oil as part of strategic reserves. The maintenance of strategic reserves is in India's national interest and ensures price stability for Indian oil companies. The filling cost of such facility entails huge financial burden. The Government has explored the possibility of meeting a substantial part of the financial burden through participation of private players including foreign national oil companies (NOCs) and multinational companies (MNCs) storing and selling crude oil from outside India. However, the storage of crude oil by NOCs/MNCs and its sale in India would create tax liability for these entities.

In order to achieve neutrality in terms of taxation to encourage the NOCs & MNCs to store their crude oil in India and to build up strategic oil reserves, it is proposed to amend the provisions of section 10 of the Act to provide that any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil therefrom to any person resident in India shall not be included in the total income

Since the storage of oil is expected to begin in the current financial year, this exemption would be available from the previous year 2015-16, i.e. assessment year 2016-17.

This amendment will take effect retrospectively from 1stApril, 2016 and will accordingly apply in relation to assessment year 2016-17 and subsequent assessment years.

• Deduction for production of mineral oil and natural gas under Section 80-IB of the IT Act

It is proposed to amend section 80-IB(9)(ii), (iv) & (v) of the Income tax Act so as to provide that no deduction shall be available to an undertaking engaged in production of mineral oil or natural gas if the production commences on or after 1st April, 2017.

Stock to watch

Reliance Industries, ONGC, Cairn India, Oil India, Indian oil, BPCL, HPCL, GAIL, Gujarat Gas Company, Indraprastha Gas, Gujarat state Petronet

Outlook

Vision for growth of Indian oilBSE 0.88 % and gas industry is being created by incentivising gas production from deepwater, ultra deepwater and high pressure-high temperature areas and offering calibrated marketing freedom for new discoveries which are yet to commence commercial production. An appropriate implementation of the proposal to incentivise deepwater, ultra deepwater areas is expected to help in improving self-sufficiency through enhanced domestic production besides bringing in foreign investment and state of the art technologies which are required for exploitation of these areas.

An appropriate implementation of the proposal to incentivise deepwater, ultra deepwater areas is expected to help in improving self-sufficiency through enhanced domestic production besides bringing in foreign investment and state of the art technologies which are required for exploitation of these areas.

Further the proposal to discontinue tax holiday on commercial production of mineral oil for blocks starting production on or after 1.4.2017 could prove to be a disincentive since the blocks offered in NELP rounds were promised a 7 year tax holiday. Marketing freedom to new discoveries should help companies optimize production and create a competitive landscape for the users

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