Cost of exploration

The oil exploration and production (E&P) industry is highly capital intensive and has a long gestation period. To encourage E&P activities, most countries, including India, provided for a special accounting and tax regime with the objective of attracting investments. E&P companies outsource to oilfield service (OFS) contractors. Typically, OFS contractors work on seismic data processing, provision of drilling rigs, floating production storage and offloading vessels and so on. Such services are closely connected with the overall E&P value chain making them an integral part of the process.

To simplify tax provisions for the OFS industry, the government introduced Section 44BB in the Indian Income Tax law for non-resident OFS contractors. Under this, 10% of the gross receipts of the non-resident are deemed its taxable income (resulting in an effective tax of 4.223%) and the non-resident is not required to maintain any books of accounts in India. Revenue authorities have contested the applicability of Section 44BB to OFS contractors, alleging that these are ‘technical’ services and, therefore, should not get the benefit of presumptive taxation. However, the courts have been taking an almost consistent view that if the services (irrespective of their nature) are in connection with E&P activities, the income of the non-resident should be computed in accordance with Section 44BB.

The Budget 2010 seeks to withdraw this regime for companies providing ‘technical services’, even if services are in connection with E&P. This amendment may also increase the overall project cost since service providers will be inclined to pass on the additional tax cost to upstream companies. Given that the Indian hydrocarbon reserves are largely under-developed and require foreign technology and expertise, the proposed amendment by the Budget will have a negative impact on the development of the sector.

Source: Financial Express

__________________________________________________________________________________