Union budget’s likely impact on oil & gas stocks

By | February 18, 2011

A few more days to go for the union budget and what are your bets for the Oil & Gas sector stocks. As the stocks will be highly volatile in the budget days, it is essential to understand the impact of union budget on the Oil & Gas sector. 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!!

Wish list for fuel companies
Two major aspects of Government policies related to Indian Oil and Gas sector are Taxation and subsidies. To encourage investment in the oil & gas sector appropriate policy measures should be taken in this forthcoming budget 2011. This will consequently push up the share price of companies in the Oil & Gas sector.

  • Currently companies involved in Exploration & production of natural gas & petroleum are allowed a seven years tax holiday for the year of starting its commercial production. Generally the losses are very high in the initial years and due to which the companies are not able to leverage the full benefit of tax holidays. Hence, if the tax provisions are made similar to other infrastructure sector companies which have the flexibility to claim taxes in a block of 10 to 15 years then it will be a boon for the companies.
  • Minimum alternate tax (MAT) of 18% on book profits defeats the purpose of providing tax holidays for the companies.  Hence, MAT of 18% should be slashed to a lower rate in this budget.
  • Duties on crude and refined petroleum products should also be slashed to benefit the state run oil companies which are forced to sell fuels at rates below the market price. On one hand such a move would lower the tax revenue of the Government but on the other hand such a move will insulate people from the burden of rising fuel prices.
  • Currently 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. However the recent amendment of excluding the technical services from the deemed taxation regime has been a dampener for foreign companies.  Hence this amendment should be revoked to encourage investment in the Indian oil & Gas industry.

Subsidies: It seems high unlikely that there will be any reduction in the forthcoming union budget as removing subsidies will have political ramifications. This is true especially when the government is already engulfed in scams and corruption charges and hence the budget needs to be consumer-friendly. In addition the inflationary pressures are very high and hence government cannot take initiatives which can increase the cost of purchase.

  • Although it seems unlikely that Government will do much on the subsides front, the Government can give a fixed subsidy per litre instead of announcing a consolidated amount in the budget.  This will allow the retailers to pass on the costs to consumer beyond the fixed cost.

Overall it seems that there might be a few changes in the taxation aspect in this forthcoming budget. If favourable fiscal policies are taken by the government then it might push up the Oil & Gas sector indices. However, you should perform your due diligence before investing in any of the Oil & Gas sector stocks.

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