Post budget impact on oil & gas

By | March 7, 2011

The Oil & Gas sector is one of the most important sectors for the future growth prospect of Indian Economy. This article analyzes the post budget impact on this sector. Therefore, if you are an investor and looking forward to take big bets on the Oil & Gas sector companies, then read through this article to know more!!

Pre-Budget Expectations of Oil & Gas companies

Two major aspects of Government policies related to Indian Oil and Gas sector are Taxation and subsidies. Following were the expectations to encourage investment in the oil & gas sector which could have pushed up the share price of companies in the Oil & Gas sector:

●      Tax provisions for Companies involved in Exploration & production of natural gas & petroleum could have been given the flexibility to claim taxes in a block of 10 to 15 years.

●      MAT of 18% could have been slashed to a lower rate in this budget.

●      Duties on crude and refined petroleum products could have been slashed to benefit the state run oil companies which are forced to sell fuels at rates below the market price.

●      The foreign oil & Gas companies providing services to exploration & production companies in India pay taxes (@ deemed profit rate of 10%) based on the deemed taxation regime which saves them from the cumbersome process of maintaining details books of account. The recent amendment of excluding the technical services from the deemed taxation could have been revoked to encourage investment in the Indian oil & Gas industry.

●      The Government could have given a fixed subsidy per litre instead of announcing a consolidated amount in the budget.

Post-Budget Announcement & impact for Oil & Gas companies

●      Tax holidays for companies involved in upstream activities i.e. Exploration & production will not be applicable for blocks licensed under contracts awarded after March 31st, 2011. This will have a huge negative impact on any commercial hydrocarbon discovery projects as it will lead to a decrease in rate of return. Companies like ONGS, OIL, RIL and Cairn will be negatively impacted.

●      Though a subsidy of Rs 23,640 Cr has been announced, the subsidy will be insufficient even if the crude prices stay at their current levels. Custom duties on crude oil haven’t been rolled back resulting in companies continue to bear higher under recoveries on petro products.

●      Mat will be livied on SEZs. This might impact the earnings of SEZ refinery and polymer cracker of RIL.

●      The provision towards the petroleum subsidy has been revised to Rs 38,386 Cr from Rs 3, 108 Crore.  This will have a positive impact on companies as it paves way for further cash compensation.

●      Though the MAT rate has been increased from 18% to 18.5% the surcharge has been reduced from 7.5% to 5%. This will have a neutral impact on companies like RIL and Cairn.

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