Natural gas sector seeks extension of tax holiday

Natural gas has emerged as the most preferred fuel due to its inherent environmentally benign nature, greater efficiency and cost effectiveness. Natural gas is used in a variety of applications, such as feedstock in fertilizer and petrochemical industry and as fuel in the power generation, manufacturing of steel, textile, ceramic, glass and other industrial products.

Natural Gas is a major source of CNG (transportation fuel) and is an essential raw material for production of electricity, fertilizers and plastics. Natural Gas, if used as a household fuel (i.e. piped natural gas), can replace LPG and SKO and if used in transportation as CNG, can replace MS & HSD. Since LPG, SKO, MS and HSD are currently price-controlled and subsidized; their replacement by Natural Gas would help in reducing the Government's outlays on subsidies to the Oil and Gas sector. However, it is also equally true that despite the substitution by Natural Gas, the consumption of MS and HSD will nevertheless grow in line with the overall increase in demand for these products.

Duty structure

Excise duty for natural gas stands nil while custom duty stands at 5 per cent. However excise duty on compressed natural gas is 14 per cent and custom duty is 5 per cent along with 14 per cent additional custom duty.

Industry expectations

The industry expects Natural gas to be in the list of declared goods and hence should be taxed at the rate of 4 per cent. Currently Natural gas is exempt from CENVAT at the Central level because of the importance of Natural Gas in the development of the economy but states levy a high rate of VAT of 12.5 per cent on natural gas.

The Industry is seeking for waiver of customs duty on import of materials viz. pipes; valves; flanges; data communication system for laying of petroleum products and gas pipelines be made NIL.

The industry expects the 80 IA benefits should be extended to intracity and intra state pipelines used for transporting natural gas from currently restricted to cross country pipelines.

The industry seeks clarification on the definition of cross-country gas distribution network. Also Income tax Act states that 1/3rd of the total pipeline capacity to be available for use on common carrier by third party to get benefits of 80 IA.  This is in conflict with pipeline policy, which provides that 1/3rd of the committed pipeline capacity to be available for use on common carrier by third party. Industry expects these issues to be clarified.

Currently tax holiday under Section 80IB (9) is available only if exploration results in striking crude oil and consequently holding that profits made on sale of gas where gas is struck is not entitled to Income tax holiday.  This benefit should be available to any find whether oil or gas.

Analysts/market expectations

It is likely that tax holiday benefits may be extended to find and sale of Natural gas. 

Stock to watch

RIL, ONGC, Gail, Gujarat Gas Company, Indraprastha Gas, Gujarat state Petronet

Outlook

Natural Gas production in KG Basin which commenced in April 2009 and is expected to go up to 80 MMSCMD of gas very soon will double the country's current production from the present level of 82 MMSCMD. Also ONGC has struck oil and gas in three new blocks with one block is expected to be as big as KG basin find.

Seeing the greater importance of Natural gas as cheaper and greener fuel along with increased availability, it is finding more space in attention. A favorable policy document from government will help in containing the rising share of oil imports with more exploration and finding of Natural gas.