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Budget fails to cheer oil drilling sector

July 07, 2009 14:27 IST

Budget provisions

The following announcements have been proposed in the Union budget 2008-09:

Industry expectations

Budget impact

Union Budget 2009-10 provided for extension of tax benefits to Natural gas under section 80-IB(9) of the Income Tax Act. This tax benefit to be available to undertakings in respect of profits derived from the commercial production of mineral oil and natural gas from oil and gas blocks which are awarded under the NELP-VIII round of bidding.

The hike in Minimum Alternate Tax (MAT) from 10% to 15% is an irritant for the corporate sector.  On the positive side, this hike has come with a benefit of extending the period allowed to carry forward the tax credit under MAT from seven years to ten years.

Also, the hike in MAT will not be earnings dilative but will only be cash flow dilative.  The increase in liability towards MAT will be matched by an incremental deferred tax credit.

Hence, the net profit or EPS of a company will not change due to hike in MAT from 10% to 15%.  But it will mean increase in cash outflow, and if the company is not returning to profits as per Income tax act within ten years, then it may have to forego them.

So, from a current year(s) point of view, increase in MAT from 10% to 15% is not earnings dilative but cash flow dilative. On the other hand, the removal of Fringe Benefit Tax (FBT) is a major positive for Corporate India.

Increase in MAT rates from 10% to 15% is negative for the oil and gas sector as these companies normally earn higher book profits in the initial years after commercial production begins, since the tax deductions in respect of exploration and drilling expenditure is granted on an accelerated basis.

Stocks to watch

ONGC, RIL, Cairn India

Outlook

No major industry specific announcement was made in the Union budget 2009-10 besides providing clarity to extension of tax holiday to natural gas from earlier available only to exploration of crude oil.

However this tax benefit to be available to undertakings in respect of profits derived from the commercial production of mineral oil and natural gas from oil and gas blocks which are awarded under the NELP-VIII round of bidding. Overall the budget is neutral to the sector.

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