Loss of tax breaks hits new refinery projects

Shirish Nadkarni
OGJ Correspondent

MUMBAI, Mar. 17 -- A sunset clause in Finance Minister Palaniappan Chidambaram's 2008-09 budget for 100% tax exemption for oil refining projects after April 2009 could undercut refinery investments, opponents said.

A petroleum refinery currently is eligible for 100% income tax exemption for the first 7 years of operation. If implemented, the provision could grossly reduce the return on capital and increase the payback period for refineries.

"The removal of tax benefits is a huge concern for the industry," said S.V. Narasimhan, finance director of India's largest refining company, Indian Oil Corp. (IOC). "Considering the massive investments needed in setting up a refinery, these incentives were essential for their economics to work out well. We plan to take up the issue with the government at the earliest to restore the benefits."

Among those facing the heat immediately will be the $2.6 billion Bharat Petroleum Bina refinery and the Hindustan Petroleum-Mittal joint venture refinery at Bhatinda. The former is slated to be completed by December 2009, while the latter is scheduled to commence operations by yearend 2010. Both would be ineligible for tax benefits.

Removal of benefits has induced Oil & Natural Gas Corp. (ONGC) to rethink its proposed new 15 million tonne/year refineries at Kakinada and Mangalore. ONGC Chairman R.S. Sharma said, with the tax breaks gone, the refineries would not be economically viable.

However, Reliance Petroleum's new 27 million tonne/year refinery at Jamnagar was luckier, as it is on schedule for commissioning by December.

Tax consultants Ernst & Young acknowledged the problem in their report on the 2008-09 budget. "The removal of the tax holiday on refining will adversely impact new refinery projects," the report said. "Tax holiday claims for production of natural gas could also be questioned in the future."

The budget proposed a new provision in subsection (9) of Section 80-IB, to provide that "no deduction will be allowed to a mineral oil refiner if it begins operations after April 2009."

There is substantial confusion over the definition of mineral oil. Most refiners are convinced it refers to petroleum crude, but one public sector refiner interpreted it as applying to edible oils and not petroleum refining. Clarification has been requested from the finance ministry.

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