KOLKATA (miningweekly.com) – India’s oil and gas industry is banking on the forthcoming national Budget to offer a series of tax incentives to ensure that the domestic industry is able to capture the benefits of global developments.

The domestic oil and gas industry and representative associations have placed their Budget demands before the government, arguing that fiscal incentives will enable local and foreign investors to consolidate businesses now that international oil prices are on a recovery trajectory after a 12-year low in 2016.

The Federation of Indian Chambers of Commerce and Industry has sought complete exemption from the 15% effective service tax rate for all activities such as survey and exploration projects in new oil and gas blocks.

India has opened up oil and gas exploration activities for international majors, but in view of the recent prolonged slump in oil prices, most majors have cut down investment and risk exposure in exploration activities and fiscal incentives are necessary to woo global oil exploration companies into the domestic markets.

Demands for fiscal sops are growing even from within the government, as in the case of liquefied natural gas (LNG).

The federal Environment and Forest Ministry has sought the scrapping of the 7.5% import duty on LNG. It has argued that scrapping the import duty will be critical to the government’s avowed policy objective of raising natural gas usage from the current 6.5% to 15% of the country’s total energy requirement over the next four years.

The Ministry has sought a countervailing increase in local and import duties on furnace oil and pet coke to incentivise the use of natural gas and to reduce the carbon footprint.

At the same time, transportation and regasification of imported LNG should also be exempted from the 15% service tax to reduce the final cost to end-users.

However, several sources in government and private oil companies have said that the most contentious matter will be the industry’s long-standing demand for a reduction in the cess imposed to fund the government’s Oil Industry Development Fund.

In the 2015/16 Budget, the government shifted from a fixed rate to an ad valorem rate of 20%.

It has been pointed out by upstream oil companies that while an ad valorem rate is acceptable to the industry in depressed market conditions, an ad valorem rate in a rising oil price regime acts as disincentive to stepping up investments and productions.

For example, at the time of shifting from a fixed rate to an ad valorem rate last year, international oil prices averaged about $40/bl, compared with the current price of above $50/bl and hence an ad valorem rate translated to a higher burden on upstream companies.

As a relief to such companies, the industry has sought the reduction of the cess to levels of 12% even if moving back to a fixed rate is not possible, officials at two national oil companies said.