Missed tax holiday will not hurt IndianOil: Finance ministry
New Delhi   02-Apr-2012


Declines to give a grace period for completing Paradip refinery project

The finance ministry has declined to give a grace period to IndianOil for completing its Paradip refinery in Orissa that has missed the March 31 deadline for benefiting from the seven-year income tax holiday.

Rejecting the oil ministry’s demand for an extension of the terminal year for the benefit, North Block has said the profit-linked incentive does not lead to a huge advantage for refineries even if the deadline is extended.

“Such large projects usually do not report big profits in the initial years as they benefit from the depreciation expense,” said a highly placed official in the finance ministry. Plant and machinery used in businesses enjoy a 25% depreciation rate, allowing a quarter of the asset’s value to be deducted from the income while calculating the tax liability. Allocating the cost of acquiring the plant and machinery over its productive life correspondingly lowers the profits as well as the tax liability for those years.

Besides, business ventures that are eligible for the seven year tax holiday under Income Tax Act 80 IB (9) are liable for paying 18% minimum alternate tax (MAT), making the tax holiday less attractive. In the 2009 Finance Bill, the government limited the benefit of tax free profits for seven consecutive years only to those refineries that start operations on or before March 31, 2012.

IndianOil officials told FE that they would pursue the matter further with the government. “We would lose 40 cents on our gross refining margin (GRM) if we do not get the tax holiday,” said an official privy to the discussions. IndianOil reported a GRM of $3.41 a barrel in the first three quarters of the 2011-12 fiscal, against $5.05 in the same time a year ago.

Sources in North Block said that Pranab Mukherjee is averse to granting huge tax exemptions to individual businesses as the government’s tax base is finite and any shortfall may have to be made up with higher indirect taxes, which affect the common man more.

The cash-strapped North Block has also said the deadline was applicable for all firms alike. In the last week of March three oil majors announced the commissioning of new refineries. HPCL-Mittal Energy announced the joint venture has commissioned its 9 million tonne refinery at Bathinda in Punjab. MRPL, an arm of ONGC, said it has raised capacity from 11.82 million tonnes a year to 15 million tonnes, while Essar Oil said it has boosted the capacity of its Vadinar refinery to 18 million tonne a year.

Experts, however, said that not getting the tax holiday will indeed have adverse an impact on new refinery projects. In the initial few years, if the overall profit is equal to the 25% depreciation expense claimed, then their tax liability is offset. But in the fifth, sixth and seventh years, having a tax holiday will certainly help refineries, said Nabin Ballodia, partner, KPMG. “The income tax holiday that existed in the Act cannot be said to be inconsequential,” said Ballodia.

IndianOil’s 15 million tonne a year refinery project got delayed due to a host of reasons including delays in procurement, skilled man power shortage, court orders staying construction on Mahanadi river and non-availability of timely clearance for right of way to lay pipelines, minister of state for petroleum and natural gas RPN Singh told Parliament in March.

With the new projects, India’s refining capacity has gone up from 194 million tonne a year to 210 million tonne. It is expected to further go up to 238 million tonne next year and to 310 million tonnes by 2016-17.