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Oil and Gas Overview 2010
conceived to address the increasing demand supply gap of energy in India. Keeping with this. The government has also been doing its bit in recent times to to deregulate the industry and encourage greater foreign participation. major developments and dynamics of the sector across the value chain. size.FOREWORD The oil and gas sector in India has been instrumental in fuelling the growth of the Indian economy. the government is planning its first ever offer of shale gas exploration in 2011. Other segments such as Refining. are also seeing some action. with Reliance Industries and Cairn being particularly active in this arena . New refineries may eventually be built by domestic companies and in partnerships as well. with Reliance Industries doubling the size of its already dominant refinery in order to meet future products demand. the Upstream sector. has proved to be successful in attracting the interest of both domestic private sector players and some foreign players with eight rounds of bidding. City Gas Distribution etc. Retailing of Fuels and the Taxation Regime specific to the Indian oil and gas sector I hope you find this report insightful and helpful in your study of the Indian Oil and Gas sector 1 Arvind Mahajan Executive Director and Head of Energy and Natural Resources Sector KPMG in India 1 KPMG Analysis . This document intends to provide the reader with a concise overview of the various segments comprising the oil and gas sector in India and a basic understanding of the players. LNG. a potential game-changer with regard to the price economics of the oil and gas sector. India is now surplus in refining capacity and aims to establish itself as a refining hub due to various geographical aspects in its favour as well. We have attempted to summarize all these aspects in the document giving facts and our views and analysis regarding this space. Refining. The New Exploration Licensing Policy (NELP). hence presenting a significant opportunity for investors in the years to come. the following chapters apprise us about the Energy Market. Shale Gas. Gas Transmission and Distribution. Coal Bed Methane. Moreover. LNG.
ACRONYMS USED E&P CBM DGH MT MMT MMSCMD MoPNG NELP NG PNGRB Exploration & Production Coal Bed Methane Directorate General of Hydrocarbons Metric Tonne Million Metric Tonnes Million Standard Cubic Metres Per Day Ministry of Petroleum and Natural Gas New Exploration Licensing Policy Natural Gas Petroleum and Natural Gas Regulatory Board .
TABLE OF CONTENTS Overview of the Indian economy The Indian oil and gas market India’s upstream sector Refining in India Gas transmission and distribution Coal bed methane Liquefied natural gas Shale gas Fuel retailing in India Overview of the Indian taxation regime Regulatory and tax regime for upstream sector 01 02 03 05 06 08 09 10 11 12 15 .
Domestic savings have been the dominant source of national savings.01 OVERVIEW OF THE INDIAN ECONOMY India booming India is gaining strategic importance globally owing to the impressive economic growth pattern and market attractiveness. one of the highest among emerging economies. India is currently the world's fourth largest economy in Purchasing Power Parity (PPP). April 2010 Growth in savings has also supported the surge in capital formation.0 6.36 trillion2. economy is set to demonstrate robust growth again with the GDP growth rate of around 9. .5 8.0 4.53 percent (2008-09).0 2.0 7.0 9.7 9. which is indicated by a steady increase in the rate of Gross Domestic Rate of Capital Formation (GDCF) from 32. where the rate of Gross Domestic Savings 1 International Monetary Fund.73 percent in 2004-05 to 34. After coming out successfully from the financial crisis. touches 32. IMF 9.7 percent for 2010-111. India GDP Growth Rates 10.93 percent in 2008-09.7 6. With a GDP of USD 1.7 2006-07 2007-08 2008-09 2009-10 2010-2011E Supported by high rate of domestic saving and capital formation… India’s growth has been financed by a steady rise in corporate and household savings. April 2010 2 Reserve bank of India.0 2005-06 Source: NCAER.4 9. World Economic Outlook.
000b/d. with Reliance Industries. India currently accounts for 0.80bn bbl of proven oil reserves (BP Statistical Review of World Energy. It is the third-biggest global coal producer. operating 10 of India’s 17 refineries and controlling about three-quarters of the domestic oil transportation network . dominating the exploration and production (E&P) segment and accounting for roughly around three-quarters of the country’s oil output.5 percent of the world’s total.4 percent of global reserves and just over 1 percent of production1. 1 Indian Energy basket . Oil accounts for about 31 percent1 of India’s total energy consumption. major discoveries by a number of domestic companies hold significant medium-to longterm potential. The oil and gas sector is dominated by statecontrolled enterprises with ONGC the largest upstream-oriented oil company.2025 Oil 25% Coal 51% Gas 20% Hydro 2% Nuclear 2% 1 BMI India Oil and Gas Report Q4 2010 Source: BP statistical review of world energy 2010 . India’s average oil production (total liquids) in 2008 was 766. although private companies have increased their market share. but has limited its supplies of oil. state-controlled Oil & Natural Gas Corporation (ONGC) and Gujarat State Petroleum Corporation (GSPC) all confirming significant deepwater finds that are now under development or in early-stage production. with Mumbai High being the biggest producing field. India’s downstream segment is also dominated by state-controlled entities. While most of the developed gas is in Mumbai High.02 THE INDIAN OIL AND GAS MARKET India is the world’s fifth-biggest energy consumer and continues to grow rapidly. India’s 5. June 2009) represents just 0. Indian Oil Corporation (IOC) is the largest state-controlled downstream company. In terms of gas. with its share of the mix having fallen from 35 percent earlier this decade.2009 Oil 32% Coal 52% Gas 10% Hydro 5% Nuclear 1% Estimated Indian Energy basket .
the highest number of exploration blocks ever. The eighth round of the NELP was launched in April 2009 offering 70 blocks. A total of 62 companies comprising 10 foreign and 52 Indian companies have made bids and 31 PSCs were signed with 20 companies in the NELP VIII. Assam. Exploration activity. the total investment made by Indian and foreign companies was around USD13. prior to The New Exploration Licensing Policy (NELP). After concluding eight rounds of NELP 239 production. sharing contracts (PSCs) have been signed2. Even after three decades.8 billion. (ONGC) and Oil India Ltd.03 INDIA’S UPSTREAM SECTOR Although the story of the Oil & Gas industry can be traced all the way back to October 1889 when oil was first explored in Digboi. (OIL). from NELP-VIII website Snapshot of previous rounds of NELP NELP-I No. Companies are expected to bid on the following parameters: • The Work Programme committed to be undertaken • Percentage of value of annual production sought to be allocated towards cost recovery • Profit petroleum share offered to the government at various levels of Investment multiples . The sector received a major boost in 1974. of Blocks awarded 48 28 45 25 NELP-II 25 23 44 23 NELP-III 27 24 52 23 NELP-IV 24 21 44 21 NELP-V 20 20 69 20 NELP-VI 55 52 185 52 NELP-VII 57 45 181 44 NELP-VIII 70 36 76 31 . Realising that these fields would gradually deplete over time and no major discoveries were being brought into production. the 1 government introduced the NELP in 199798. was dominated by public sector firms such as Oil and Natural Gas Corporation Ltd. these fields continue to be the mainstay of India's indigenous production . As on 30 June 2010. with an aim of encouraging private sector investment in the oil and gas sector and providing a level playing field to the public and private sector through allocating acreages on the basis of competitive bidding as opposed to a nomination basis of earlier. The weightage to the above three parameters has varied from one round to the other over the eight rounds of NELP . India still has vast unexplored/poorly explored territories. 1 NELP VIII website 2 Notice Inviting Offers for NELP VIII. of blocks offered No. of bids received No. of blocks bid for No. when the massive Mumbai High fields were discovered off India's west coast.
Also. The government has also shown positive intent in terms of monetising unconventional resources like shale gas and could be prepared to organise bid rounds as early as mid next year. Schlumberger. etc. Outlook for E&P activity in India Given the commencement of production from RIL's KG Basin fields. Aker Kvaerner. Aban Lloyd. On the other hand. As a result. with an increased exploration activity in India post NELP we are likely to witness . BJ Services. the E&P sector is poised to see considerable activity in the near future. particularly off India's east coast. increased demand for oil and gas allied services in India. are likely to find that the market for their services in India continues to grow. the commencement of Cairn India's production and the potential development of the discoveries announced by GSPC and ONGC. . On the other hand. This could mean an increased interest in exploring India's hydrocarbon potential by foreign players. particularly given the focus on deepwater blocks and frontier basins. However. Indian service providers will be scaling up their activities and capabilities. the promise offered by certain acreages. MNC players such as Baker Hughes. enhancing their fleet size and widen their portfolio by offering different specialised services and developing their manpower. Some of the local players might also aim to offer their services to other E&P (Exploration & Production) firms across the world e.04 NELP IX NELP IX was announced in October 2010 with various road shows being planned in major Indian and international cities by the government to attract private investment. means that the prospects for the growth of the upstream sector remains bright with an expected positive spin-off effect on the provision of off-shore services.g. the recent economic downturn as well as the perceived government intervention on freedom to market gas could serve as a dampener.
Capacity additions as well as Greenfield refineries announced by public and private sector players indicate that almost 40-50 MMTPA of additional refining capacity will be added by 2013-14 bringing the total available capacity to nearly 240 MMTPA. China and some Middle Eastern countries . Outlook for refining sector Regardless of above.05 REFINING IN INDIA India. As far as the PSU refineries are concerned. public sector units have a capacity of 107 MMTPA while the . which are land-locked and possess a suboptimal economic size. permits for Greenfield refineries are hard to obtain in these countries due to the environmental concerns. Similarly major technology upgrades are necessary to be able to produce output from relatively lower grade crude which reduces sourcing costs thus increasing margins as well as meet new fuel specification standards. capacity addition is primarily coming from emerging economies like India. some players are mulling over setting up inland refineries close to demand centers thus reducing the cost of distribution (e. with considerable capacity additions being planned over the next few years . Status of the sector The country has further large expansions planned and is aiming to emerge as a refining hub even as global refining markets have tightened with the closure of small refineries in North America and Europe mainly due to challenges in investing in cleaner fuels and high compliance costs. In the medium term this surplus supply indicates that there may be reservations against making more investments in the refinery space till the time domestic demand catches up. Of a total of 20 refineries in India. BPCL plans to set up a 12 mtpa refinery in Allahabad). Many of the private sector refineries are focusing on the export market. This may result in substituting products of other refineries and hence creating pressure on the coastal refineries to look at exports. In addition. 1 the small refineries in the North-east. Therefore.g. concerns have been expressed over the viability of 1 MoPNG 300 250 200 150 100 50 Capacity 241 MMTPA 127 2005 2006 2007 2008 2009 2010 2011 2012 2013 .5 private sector players comprising of RIL and Essar have a capacity of close to 72 MMTPA. with its current capacity of around 180 million tones per annum (mtpa) is poised to emerge as a major refining hub.
Pakistan and India. September 2010 PNGRB Wikipedia. but this is likely to change in the medium term. with the volumes being divided between the two importing countries of India and Pakistan. Although some progress was made.and recently. PNGRB has completed the 1 Iran-Pakistan-India pipeline The IPI Gas Pipeline Project has been conceived as a tripartite arrangement between Iran. With the recent domestic gas finds in the KG basin off the East coast of India the transmission of gas to the demand centres based in the west and north of the country has assumed greater importance. Gujarat State Petronet Ltd. This expansion in infrastructure would lead to better gas availability. and a few other pipelines. Issues around safe delivery of gas through Pakistan and price of gas lead to the talks being suspended in 2008. connecting the LNG terminal at Dahej to Vijaipur and Uran and the power plant at Dabhol to Panvel . It would supply 38 mmscmd of gas to India. 1 2 3 4 RGTIL website. a GSPC Group company involved in gas transmission arm also has an extensive network of around 2400 Km in Gujarat.06 GAS TRANSMISSION AND DISTRIBUTION The transmission and distribution segment of the natural gas sector remains relatively under-developed. several outstanding issues remained. better tapping of demand and thus in turn increase the natural gas demand. It operates the Hazira – Vijaipur – Jagdishpur (HVJ) . The existing pipeline capacity of ~220 mmscmd is expected to increase to ~ 660 mmscmd in the medium term . Reliance Gas Transportation Infrastructure Limited (RGTIL) has implemented the 1385 Km East West Gas Pipeline to carry 80 mnscmd (million standard cubic metres per day ) of natural gas from Kakinada in Andhra Pradesh to Bharuch in Gujarat and traverses through the states of Karnataka and Maharashtra and it has further planned 1 bidding process for three new pipelines too. The pipeline is estimated to cost around USD 7 billion and is expected to be 2300 . 2 Transnational pipelines Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline The Asian Development Bank (ADB)-backed 1. to construct four new cross country pipelines . The pipeline traverses through Afghanistan and Pakistan (including 145 km in Turkmenistan. Dadri Vijaipur Pipeline (total 3452 Km long). In April 2010 some progress was made when India proposed to discuss the pipeline with Iran .680-km long pipeline is likely to connect the gas fields in Turkmenistan to India.5 Km in length . 735 km in Afghanistan and 800 km in Pakistan upto the India border). September 2010 (Iran-Pakistan-India Pipeline) Times of India. (GSPL). July 2010 (IPI Pipeline: India to resume talks with Iran) . 4 3 Gas transmission The gas transmission domain in India has been dominated by the GAIL India Limited.
39 mmscmd of gas on firm and fall back basis from RIL D-6 block in the ’s KG Basin . The government is also playing its part. These licenses are awarded through an open competitive bidding process. with there being a level playing field for both domestic and foreign entities. in which both ONGC Videsh and GAIL own a stake. paving the way for the establishment of a regional gas grid . In addition to the above. was considered to bring gas to India.com. while passing through Bangladesh. It has allocated 3. February 2010 (‘Bangladesh agrees to trination gas pipeline’) 6 Infraline and Secondary Research . manufacturing firms. 6 only the firms already in the gas transportation and distribution business but also other firms which would like to diversify into this sector. City gas distribution The City Gas Distribution (CGD) space in India has been steadily increasing with many cities being added into the fold after New Delhi.07 Myanmar-Bangladesh-India pipeline A 1. Going forward more cities are likely to have access to local gas distribution networks. 5 PNGRB has already completed two rounds of bidding for awarding licenses for city gas distribution for various cities. Mumbai and others in Gujarat.575 km long pipeline connecting the Shwe field in the A-1 block in Myanmar. infrastructure players and others have shown interest in this sector. Maharashtra . 5 Livemint. the opportunity could be available. Andhra Pradesh. what now matters is whether the CGD license-holders can obtain gas supplies and develop gas distribution infrastructure. PNGRB has also called for the third and the fourth round of bids for the states of Gujarat. engineering consultants. Punjab. Madhya Pradesh and Uttar Pradesh (Round 4). foreign gas majors. The notification of Section 16 of the PNGRB Act in March 2010 allowing PNGRB to grant licenses for CGD is likely to quicken the pace of rollout of CGD services in cities and geographical areas. With the development of RIL's KG Basin and other fields. EPC contractors. In February 2010 Bangladesh lifted its opposition to a gas pipeline linking India and Myanmar and running through its territory. stricter environmental norms around urban centres and increasing urbanisation is likely to increase the demand for piped natural gas as a clean and efficient fuel. The CGD space is seeing bidding from not Outlook for transformation and distribution The main driver for the development of gas transmission and CGD shall be the availability of requisite volumes of gas. Haryana and West Bengal (Round 3) and Kerala.
So far four rounds of bidding have been completed and 33 blocks have been awarded. a MoU was signed between the MoPNG and Ministry of Coal in September 1997 The first round of CBM was held in . participating interest • No up-front payment • No signature bonus required • No customs duty on imports • Freedom to sell gas domestically at market-determined rates. bidding deciding the award of acreages.79 Gas 1. Btoe 8. Reliance Natural Resources Ltd. Some of the companies have also entered into commercial long term Gas Sale Agreement.0 10. BP Exploration. Reliance Energy Ltd.08 COAL BED METHANE In order to exploit India's vast coal reserves and the methane gas trapped in coal seams. GeoPetrol etc2. Report of Expert Committee. The potential of CBM as a primary energy resource in India is being established and increasingly efforts are being made to commercialise the same. The proven CBM reserves in India are equivalent to the Oil and Natural gas reserves in India1. (Ministry of Petroleum and Natural Gas) was to be the administrative ministry with the DGH (Directorate General of Hydrocarbons) as the implementing agency and accordingly. Essar and foreign players – Arrow Energy.22 Coal Lignite Oil 0.0 2. Major Terms and conditions offered to the bidders for Round four • Fiscal stability provision in the contract • No govt. August. The policy regime is also favourable to exploration and commercialisation of the CBM opportunity in India. on the lines of NELP with competitive . At USD 4.2/mmbtu it translates to a USD 130 billion opportunity.0 12.0 1.77 1 Integrated Energy Policy. 2001.49 This sector has attracted public sector enterprises – ONGC and GAIL. 2006 pipeline’) 2 KPMG Research .0 4.0 13. domestic private sector companies – Great Eastern Energy Corporation (GEECL). the government formulated a Policy for Coal Bed Methane (CBM) in 1997 The MoPNG . Planning Commission.10 CBM 0.0 6. 14.
5 in Phase I To be increased to 5 6 2. The historic demand-supply gap of natural gas has provided an impetus in setting up LNG terminals. Besides the existing LNG terminals at Dahej and Hazira and their expansion plans. with total capacity of 12. LNG may be cost efficient to few consumer segments like Industrial consumers. few other LNG terminals of combined capacity of 21 MTPA are planned to be added in India over the next few years. This leads to higher landed price for LNG to consumers than most of the alternative fuels.5 Expected timelines 2012 beyond 2012 2014 2014 2014 Ratnagiri Gas and Power Projects Ltd PLL Adani Group and GSPC IOCL ONGC Overall. Petrochemical plants and CGD.09 LIQUEFIED NATURAL GAS Liquefied Natural Gas (LNG) trade has picked up significantly in recent years owing to increasing demand. LNG is more expensive than domestic gas due to the additional cost of liquification. This constituted about 29 percent of total natural gas supply in India in 2008-09. Out of total LNG imports. India is expected to have LNG terminals of ~20 MTPA capacity by 2012 and ~38. Acceptability of natural gas as a fuel is dependent on its price vis-à-vis alternate fuels.5 MTPA capacity once the operations in all the proposed terminals commence.5 MTPA . 1 Crisil 2 Hazira and Dahej Terminal Website . No. declining domestic natural gas resources in gasconsuming countries and efforts of gasproducing countries to commercialise their resources. 1) 2) 3) 4) 5) Terminal Dabhol Kochi Mundra Ennore Mangalore Promoter The LNG imports in India in 2008-09 were estimated at 30 mmscmd. one each in Dahej and Hazira. Currently India has two 1 operational LNG terminals both located in Gujarat. At current prices. One of the key drivers to improve LNG demand in domestic market will be India's ability to source long term LNG at competitive prices.5 2. 2 Capacity (MTPA) 5 2. 63 percent was imported on firm contract basis while 37 percent was imported on the spot basis . shipping and re-gassification. The proposed pooled pricing mechanism may also help in boosting the LNG demand in other sectors as well. The LNG market has also seen key developments in the past few years including declining capital costs of LNG liquefaction plants and more flexibility in tenure and pricing of LNG Contracts Sr.
horizontal drilling is often used with shale gas to create maximum surface area in contact with the shale and hence improve gas recovery. Germany. Over the last decade. prospects of large shale deposits exists across the Cambay basin. Hungary. The government plans to launch the first round of Shale gas bidding in mid 2011. In order to truly exploit the potential of shale gas in the country the following needs to be expedited: • Technical assessment of shale deposits and identification of possible gas producing areas • Comprehensive policy on shale gas exploration. KG basin and Cauvery basin. This whole cycle of developing cost efficient technologies to bring down the cost of monetising unconventional resources in the US has captured the 1 attention of a large number of nations like Canada. Assam – Arakan basin. although more studies are required to assess the true potential of our geological basins. The fiscal and contractual regime for such exploration is also something the government needs to look at as the option could be between a royalty regime (like in US) and a Production Sharing Contracts (conventional oil and gas resources in India) . Sweden. ONGC is carrying out a pilot project in the Damodar basin. China. development and production • Participation from firms with technology and infrastructure to bring down costs of development and production. which are fine-grained sedimentary rocks formed by compaction of clay and other minerals. it could be a big boost to a country which needs energy security for a fast developing economy. some of the major players have taken a keen interest in shale gas. the costs of drilling and fracturing techniques have come down substantially and now shale gas is able to compete even at prevailing lower gas prices.10 A NOTE ON SHALE GAS Shale gas is natural gas produced from shale. if large resource bases are established. Reliance has already acquired stakes in Marcellus shale and Eagle Ford acreage in US . This has resulted in huge negative impact on imported LNG in the US and severe under utilisation of the LNG regasification terminals. Shale formations have low matrix permeability and to produce gas in commercial quantities it requires fractures to improve the permeability. The shale formations act as both reservoir as well as source rock. UK and India. which is the 1 1 first of its kind in India. In anticipation of the above. India's current policy on exploration doesn't cover unconventional resources and hence a new policy especially for shale gas may be required in the future. Similarly. Shale gas definitely is an opportunity in the near future and. Australia. In the Indian context. 1 Oil and Gas journal 2010 . The interest in shale gas really picked up during 2005-06 when the Henry Hub prices were at an all time high .
market. with the burden being shared between the oil marketing firms. Kerosene and LPG. 1 Business Standard . However. Essar and Shell have entered the additional facilities are also likely to invest in modernisation and branding initiatives. In June 2010.000 crore in revenues in 2010-11 fiscal. even after this decision. In addition to this. Although the private sector firms of RIL. SKO and LPG. Pranab Mukherjee decided to give a free hand to oil companies to determine petrol (MS) prices in line with the market price following the Kirit Parikh Committee recommendations . Fuel retailing outlets with such 1 Outlook for fuel retaling The fuel retail market in India continues to be dominated by PSU firms with Indian Oil boasting of an approximately 50 percent market share. were not allowed the same freedom. Petrol currently accounts for only a tenth of all petroleum products consumed where as diesel accounts for nearly one-third of all products consumed within India. due to the significant inflationary 1 effects on the economy given that it is the main fuel for the movement of goods in India. the government also announced a hike in prices of Petrol (MS). Another opportunity lies in exploiting the potential of non-fuel retail at the existing fuel outlets. plans to have 200 fuel outlets by the end of FY 09-10 . Diesel prices. particularly given the prime location of fuel outlets at metros. The Indian fuel market does hold some promise. with its aim of insulating the Indian consumer from volatility of crude oil prices in the international markets. The government through its Empowered Group of Ministers (EGoM) led by the Finance Minister of India.11 FUEL RETAILING IN INDIA Indian private sector was not allowed in the retailing of fuel up to 2002. Recent media reports have shown that Shell India. MS. however. Although this is a commendatory step. the government and the public sector oil companies are expected to bear an estimated underrecovery of about INR 53. has been subsidising end-user prices of HSD.000 crore as opposed to INR 74. The government. they have found it difficult to sustain operations given the price regulation in place. Convenience shopping and the establishment of ATMs provide an opportunity. the government decided to open the sector to private participation subject to certain restrictions. arguably. while the other public sector fuel marketers HPCL and BPCL have five and approximately 25 percent market share each. This has translated into a large subsidy being given to the domestic consumer. Subsequently. a major step was taken in the area of moving towards market determined pricing. more so if the market forces are allowed free reign as indicated by recent measures. Diesel (HSD). there are indications that private sector interest has renewed in this space. with 'Club HP' of HPCL being one such initiative. the domestic arm of Royal Dutch Shell Plc. the government (which has been issuing oil bonds to the PSU marketers to compensate them for their under-recoveries) and the upstream PSU firms of ONGC and OIL.
capital gains realised on any disposition of corporation’s capital assets and residual income arising from non-business income. a corporation income comprises income from business or property. The brief overview of India taxation system is outlined below: Corporate income-tax • For Indian income tax purposes. Scope of total income2 • A resident in India is liable to tax on its world wide income irrespective of the source of income • A non resident in India is liable to tax on income received or deemed to be received in India or any income accruing or arising or deemed to be accruing or arising in India. as computed under the normal provisions. 1961. The tax rates have been rationalised and compared favourably with many other countries. In wake of economic reforms. 1961 3 Finance Act. 1 Indian Income-tax Act. as shown in the books of account • Carry forward and set off of MAT is available for 10 subsequent years. the tax laws have also been simplified to ensure better compliances. firm. is less than 18 percent of its book profits • In computing 'book profits' for MAT purposes. certain positive and negative adjustments are made to the net profit India has a federal level tax structure governed by the provisions of the Income Tax Act. It has a network of treaties with over 90 countries across the globe to avoid double taxation of income. 1961 . Minimum alternate tax (MAT)4 • MAT is applicable to a company. Corporate tax rate3 • Domestic companies are subject to tax at the rate of 30 percent whereas foreign companies are subject to tax at the rate of 40 percent • The tax rate is enhanced by surcharge & education cess as may be applicable to the tax payer. if tax payable by the company on its total income. 1961 2 Section 5 of Indian Income-tax Act. Further.12 OVERVIEW OF THE INDIAN TAXATION SYSTEM Direct tax 1 Scheme of taxation • Taxation of a person depends upon its legal status (a person being an individual. over the period of time.) and residential status • Indian tax system recognises an entity level taxation. 2010 4 Section 115JB of Indian Income-tax Act. the taxation system has undergone tremendous changes in the past ten years. etc. company.
depreciation can be carried forward indefinitely • No tax on remittance of profits by foreign companies (project office/branch office to head office)9.000 500.A.Resident but not ordinarily resident (RNOR) .Resident and ordinarily resident (ROR) .000 * Surcharge is not applicable * Education cess is applicable at the rate of 3 percent on income tax 5 Section 115-O of Indian Income-tax Act. 1961 and the Exchange Control / Regulatory provisions 10 Section 6 of Indian Income-tax Act.001 .800.0035%* N. Transfer pricing regulations7 • India has a Transfer Pricing regime under which international transactions between associated enterprises are required to be computed with regard to their arm's length price. Corporate tax rates at glance 6 the information and documents which are required to be maintained by every person who has entered into an international transaction with its associated enterprises. an individual could be: .609% NA Foreign Corporation 42. 1961 11 Finance Act 2010 . 1961 6 Finance Act 2010 7 Chapter X of Indian Income-tax Act. 160. NA *In case net income exceeds 10 million Taxation of individuals 10 Taxability Worldwide income Residential Status Received in India ROR RNOR* NR ü ü ü Received outside India ü û û Received in India ü ü ü Received outside India ü ü ü Indian income • Taxability of an individual is dependent on his/her residential status • The residential status of an individual is determined on the basis of his/her physical presence in India • Based on the satisfaction of certain conditions.000 Above 800.000 * In case of resident individual of the age of 65 or above the basic exemption limit is 240.001 * Income derived by a RNOR from a business controlled or profession set up in India shall be taxable in India Tax rates applicable for the financial year 11 2010-2011 Taxable Income Upto 160000* Rate percent Nil 10% 20% 30% * In the case of resident woman below the age of 65 years the basic exemption limit is 190.23%* 19. Rates applicable for the financial year 2010-2011 are as follows: Resources Corporate tax rate Minimum Alternate tax Dividend Distribution tax Branch Profit Tax Domestic Corporation 33. distributed or paid by an Indian company • DDT is payable in addition to regular corporate income tax. These regulations also apply to cost sharing arrangements • Transfer Pricing Regulations prescribes Other features8 • Loss carry forward permitted upto eight years.609 percent on the amount of dividend declared. however.Non-resident (NR) • Income of non-resident is generally computed in the same manner as the resident.22%* 19. 1961 9 Indian Income-tax Act.13 Dividend distribution tax (DDT)5 • DDT is levied at the rate of 16.001 .500.93%* 16. 1961 8 Section 72 and Section 32 of Indian Income-tax Act.
VAT has been implemented in almost all Indian States and Union Territories with exception of Andaman and Nicobar and Lakshadweep • VAT is a multi-point taxation system Custom duty • Custom Duty is payable on import of goods/ equipments into India • It is levied as per rates specified in the Customs Tariff laws depending upon the prescribed HSN classification • Peak rate of Customs Duty is 10 percent. the rules and regulations thereunder .14 Key indirect taxes Service tax 12 VAT legislation • Since its inception in April 2005. some category of goods have been declared exempt from levy of State VAT • Interstate sale of goods is subject to a CST levy and currently applicable at 2% subject to conditions. scientific and technical consultancy. entailing a VAT at every point of sale and sale includes transfer of right to use goods and transfer of property in goods in the course of execution of works contracts Excise duty • Generally levied at the rate of 10 • Dealers are allowed to avail credit of input VAT paid on inputs and capital goods for set-off against output VAT/ CST • Common rate of tax adopted across all States with rates generally ranging from 4percent to 15percent for different categories of goods. telecommunication. business auxiliary services are some of the key categories • Service tax is applicable at 10. IPR.export determined as per prescribed rules • Import of service liable to service tax in hands of recipient in India . • Service tax is applicable on identified services provided or received in India • Current scope of taxable services is very wide and covers a vast majority of service categories • Mining. Survey & exploration of minerals. as amended from time to time. Also. training. CST is a noncreditable levy. insurance. manpower supply.import determined as per prescribed rules. 1962 and State-specific VAT legislations. 1994. percent plus education cess of 3 percent on manufacture of goods • Payable at the time of removal of goods from factory gate • Excise duty paid by the buyer to the seller is available as input credit and may be utilized to set-off the buyer’s output Excise duty/ Service tax liability 12 Comprises of relevant provisions of Finance Act. construction. online database access. . Transportation. The Customs Act.30 percent • Export of services are not subject to service tax .
Expenditure by way of infructuous or abortive exploration .e. Section 42 of Indian Income-tax Act. Article 17 of PSC and relevant indirect tax provisions . India also provides a customized tax regime for the upstream sector and nonresident service providers in relation to Exploration & Production operations. • As per these provisions.Expenditure incurred for exploration or drilling activities or services or assets used for these activities. exploration or production of mineral oil. This will however be subject to the existing sectoral policy • A foreign company can setup a project office or an Indian company for undertaking upstream operations in India. to be determined in accordance with the special provisions contained in the PSC • The provisions of the domestic tax law are deemed to be modified to that extent.15 REGULATORY AND TAX REGIME FOR UPSTREAM SECTOR Regulatory and tax regime for upstream sector 13 Income tax India also provides a customized tax regime for the upstream sector and nonresident service providers in relation to Exploration and Production operations. A brief overview of the regulatory and tax regime for upstream sector is outlined below: Regulatory • FDI up-to 100 percent permitted under automatic route (i. PSC • Hundred percent deduction of exploration and drilling expenses (both capital and revenue allowed) and other expenses (including production expenditure) allowed under normal provisions of the Income-tax Act 13 Comprises of Foreign Direct Investment Guidelines. taxable profits of a tax payer. There is a special mechanism for taxation of income of companies which have entered into a Production Sharing Contract (PSC) with the Government of India for undertaking exploration and production activities. without approval) in exploration activities of oil and natural gas fields. Special provision • Specific allowances [in addition or in lieu of allowances under normal provisions] as specified in the PSC are permitted. infrastructure related to marketing of petroleum products. actual trading and marketing of petroleum products. • The specific allowances relate to: . 1961. who has entered into a PSC with the Government for participation in the business of prospecting. market study and formulation.
Sum deposited either in a special account or in a "Site Restoration Account" or . geophysical or other prospecting. Relevant Service Tax Category • Survey and exploration of mineral. surface and subsurface surveying or map making 14 Section 80IB(9) of Indian Income-tax Act. subject to following conditions: • Commercial or industrial construction . 1961 16 Section 44BB of Indian Income-tax Act.Keep/maintain books/documents . 1994 and the rules and regulations thereunder . 4. • Hundred percent tax holiday available in respect of profits earned from production of natural gas from the blocks licensed under NELP VIII and CBM IV • Tax holiday is available for seven consecutive years from the year of commencement of commercial production.Includes drilling. oil & gas’ No ring fencing of expenditure All unsuccessful exploration costs in other contract areas can be set off against income in the contract area in which commercial production has commenced.Technical testing and analysis Custom duty17 • Subject to certain procedures and conditions. • Ten percent of the gross receipts deemed to be business income resulting in an effective tax rate of service. companies availing deduction under these provisions would still be liable to pay MAT on 'book profits'. oil & gas services (effective from 10 September 2004) . Service tax 18 contribution to site restoration fund • Amount of deduction being lower of: . mineral oils.Furnish tax audit report . . oil or gas • Site formation and clearance services (effective from 16 June 2005) . imported for exclusive use in petroleum operations • Specified goods required in connection with petroleum operations under specific exemption notification • Parts and raw materials for manufacture of goods for the purpose of off-shore Excise duty • Equipment and machinery procured for exploration and production operations are eligible for deemed export benefits which include Excise duty drawback/ exemption / advance authorization. Tax holiday 14 .Includes geological. in relation to location or exploration of deposits of mineral. boring and core extraction services in relation to site formation and clearance. • However. 1962 and the rules and regulations thereunder 18 The Finance Act. Custom Duty exemption is available for: • Equipments etc.Includes construction of well head and civil works at site. • Service tax also leviable on the following services: .223 percent of gross revenues (rate as applicable for financial year 20102011) • The tax payer has an option to claim lower profits. Deductibility of site restoration fund • Special deduction is available for 15 petroleum operations undertaken under specified contracts.Cleaning (including services for tank. or extraction or production of.Compulsory scrutiny assessment.Twenty percent of the profits calculated in the prescribed manner.Get accounts tax audited • Hundred percent tax holiday available in respect of profits earned from production of mineral oils. reservoir of commercial or industrial building and premise). 1961 15 Section 33ABA of Indian Income-tax Act. excavation and earth moving and demolition • Mining services (effective from 1 June 2007) .Dredging services .16 • PSC also lay down the manner of deduction as: Allowable expenditure is aggregated till the commencement of commercial production Accumulated expenditure allowed in the year of commencement of commercial production or permitted to be amortized over a period of 10 years. 1961 17 Custom Act. Taxation of service providers16 • There is a special tax regime for nonresident service providers engaged in the business of providing services or facilities or supplying plant and machinery on hire in connection with prospecting for. .Introduced to tax 'any service provided in relation to mining of minerals.Pipeline transportation .
if tax payable by the company on its total income. 2010 (DTC). as computed under the normal provisions. In addition. foreign companies are also liable to a 15 percent branch profit tax (BPT) on post tax income • MAT applicable to a companies. subject to following conditions: . Taxation of service providers • Income of non-resident service providers engaged in the business of providing services or facilities or supplying plant and machinery on hire in connection with prospecting for. infructuous and abortive expenditure allowed • The tax payer has an option to claim lower profits. . N.Get accounts tax audited . is less than 20 percent of its book profits. the government proposes to replace the existing tax regime with the new Direct Tax Code Bill. The DTC is likely to be effective from 1 April 2010 and the key features are as under: • Income has been proposed to be classified into two broad group (i) Income from Ordinary Sources and (ii) Income from Special Sources. Carry forward and set off of MAT is available for 15 subsequent years • DDT is levied at the rate of 15 percent on the amount of dividend declared. Resources Corporate tax rate Minimum Alternate tax Dividend Distribution tax Branch Profits Tax Domestic Foreign Corporation Corporation 30% 20% 30% 20% • Deduction for deposit made to Site Restoration Fund • Profit-linked deductions are replaced with investment based incentives are introduced • DTC provides for grandfathering of tax 15% N. mineral oils and mineral oil is classified as Special Source income • 14 percent of the gross receipts deemed to be business income resulting in an effective tax rate of 4.17 Proposed legisation . or extraction or production of.Keep/maintain books/documents .2 percent of gross revenues (at tax rate of 30 percent) Tax regime for upstream sector DTC has proposed specific tax regime for the upstream sector (Schedule Eleventh) and non-resident service providers (Schedule Fourteenth) in relation to Exploration & Production operations. • The DTC provides for General AntiAvoidance Rules (GAAR) provisions which empower the revenue authorities with sweeping powers to declare any arrangement impermissible if entered with the objective of obtaining a tax benefit and lacks commercial substance.A. distributed or paid by an Indian company • Corporate tax rates at a glance: • Provisions related to Controlled Foreign Corporations (CFC) have been introduced and it gets attracted when a foreign company is controlled by resident tax payers. Key features of the DTC provisions are as under • Income from business of exploration and production of mineral oil is classified as Special Source income • Specific computation mechanism prescribed in Schedule Eleventh • Deduction for capital expenditure and revenue expenditure.Compulsory scrutiny assessment. 15% holiday available to oil and gas undertaking which are eligible for such benefit under the present tax regime.Furnish tax audit report .A.Direct Tax Code Bill 2010 In an attempt to simplify the direct tax provisions. • The tax rate for companies (domestic as well as foreign companies ) have been pegged at 30 percent.
the precise impact of GST on Oil and Gas sector needs to be analyzed in light of the GST provisions.Goods and services tax • The Finance Minister while presenting the Union Budget 2010-11 expressed the Government's 'earnest endeavour' to roll out GST on 1 April 2011. due to lack of consensus between States and Centre. if not all.. Service tax.e. however. of the current Central and State levies like Excise duty. . VAT/ CST. Centre and State level) and is likely to subsume most. Key areas of relevance under the proposed GST regime Although. in due course of time.e. based on the existing information in the public domain: • Likely increase/ change in tax rates of goods and services with a proposed GST rate of 20/16 percent • Stock transfers are likely to be taxable under GST at par with inter-state supplies • Fate of existing Customs/ Excise duty exemptions for equipment unclear in light of overall intent of GST • Imports to be brought under the GST net for the first time • Concessional CST rate (2 percent) on inter-state purchases likely to be discontinued • The definition of 'India' may be widened under GST regime to cover all the offshore supply of goods and services within the Exclusive Economic Zones.18 Proposed legisation . etc. • Free flow of credits are proposed under GST regime (i. applicable on a comprehensive base of both goods and services • GST in India is proposed to be a dual levy (i. the said deadline may be extended • GST would be a destination-based tax levied on consumption. the following is the likely impact on the same. input taxes paid on procurement of goods and services can be set off against output taxes payable on supply/ provision of goods/ services) • Whether petroleum products would be included in GST ambit is still uncertain.
19 Appendix I: Map of Existing and Proposed Gas Pipelines Source: PNGRB .
5mtpa) Dabhol (5mtpa) Mangalore (2.5mtpa) Hazira II (2.5mtpa) Ennore (2.20 Appendix II: Existing and Proposed LNG Terminals Dahej I&II (10mtpa) Dahej III (2.5mtpa) Mundra (6mtpa) Hazira I (2.5mpta) Expected to come up by FY 12 Expected to come up after FY 12 Existing LNG Terminal Proposed LNG Terminal Source: KPMG Analysis .5mtpa) Kochi (2.5mtpa) Kochi (2.
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