Upstream Taxation India

8/14/2019 Upstream Taxation India

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GLOBAL TAX ADVISORY SERVICES

PSC & Related Direct Taxation IssuesPSC & Related Direct Taxation Issues

Ravi Mahajan

Discovery to Delivery: Resource Mobilisation for Indias Upstream Sector


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OverviewOverviewOverview

Association of Persons

Section 42(I) read with Article 17 of Model PSC

Site Restoration

Tax Holiday

Farm Out: Taxation Principles


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Association of Persons


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Association of Persons (AOP)Association of Persons (AOP)Association of Persons (AOP)

Concept of Association of Persons (AOP)

A consortium of members engaging in common scope of work, with joint

and several liability to earn income may be regarded as AOP

In case an AOP is classified as a resident (if any part of control and

management is in India), worldwide income of the AOP may become

taxable in India; issues arise in relation to claim of depreciation

In case of consortium undertaking E&P activities, if an Indian entity (like

ONGC) is also a member, it is likely to attract a higher rate of tax; this may

cause concern to members

Relief from AOP taxation

Under Section 293A, government has powers to provide incentives for

participation in the oil and gas business

Government has issued notification GSR 117(E) which provides that

persons who have entered into agreements with the Government for the

extraction etc of mineral oils will not be assessed to tax as AOP


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Section 42(I) read with Article 17 of Model PSC


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Section 42(I)Section 42(I)Section 42(I)

Enabling provisions under domestic tax lawEligibility

Business consisting of prospecting for or extraction or production of

mineral oils (includes petroleum and natural gas)

Has entered into a Production Sharing Contract (PSC) with the

Government

Specific provisions

Specific allowances [in addition or in lieu of allowances under the Incometax Act, 1961 (Act)] as specified in the PSC are permitted

The specific allowances could relate to: Expenditure by way of infructuous or abortive exploration

Expenditure incurred for exploration or drilling activities or services or assets usedfor these activities

Depletion of mineral oil in the mining area post commercial production


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Article 17 of Model PSCArticle 17 of Model PSCArticle 17 of Model PSC

Allowability of expenditure

100% of exploration and drilling expenditure is allowed (both capital and

revenue)

Expenditure incurred on development and production activities (other than

drilling expenditure) is allowed as per the Act

No ring fencing of expenditure

All unsuccessful exploration costs in other contract areas can be set offagainst income in the contract area in which commercial production has

commenced

Manner of deduction

Allowable expenditure is aggregated

Does not lapse after 8 years like tax losses

Accumulated expenditure is deducted against income post-commencement

of commercial production


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Section 42 read with Article 17Section 42 read with Article 17Section 42 read with Article 17

Concept of unsuccessful exploration costs

Determination on year to year basis vis--vis aggregation upto year of

commencement of commercial production

Whether unsuccessful exploration cost adjustable against otherincome (other than income from producing PSCs)

Treatment of expenditure incurred post declaration of

commercial discovery Whether required to be aggregated/can be termed as unsuccessful


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Site RestorationSite Restoration


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Site RestorationSite RestorationSite Restoration

Section 33ABAEligibility

Business of prospecting for, or extraction or production of petroleum or

natural gas or both

Has entered into a PSC with the Government

Deduction being lesser of

Sum deposited either in a special account or Site Restoration Account or 20% of the profits for relevant financial year calculated as per the provisions

of the Act

Some issues

Whether Section 33ABA over rides or is in addition to Section 37(1) relating

to deductibility of business expenses?

Level playing field option to maintain deposit in dollar terms in case of

foreign companies


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Tax HolidayTax Holiday


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Tax Holiday Section 80 IB...Tax HolidayTax HolidaySection 80 IB...Section 80 IB...

Eligibility

Establishment of undertaking

The business to involve commercial production or refining of mineral oils

Commercial production of mineral oil on or after April 1, 1997

Exception: Undertaking in North-Eastern region even prior to April 1, 1997

Refining of mineral oil on or after October 1, 1998

Deduction available 100% of profits

For seven consecutive years including initial year


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...Tax Holiday Some Issues...Tax Holiday...Tax HolidaySome IssuesSome Issues

What is an undertaking?

Contract area /

Block

Oil field

Oil well


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Whether an operator taking over an existing oil field(s)eligible for benefit?

...Tax Holiday Some Issues...Tax Holiday...Tax HolidaySome IssuesSome Issues

Relinquishment by existing operator

Signing of new PSC with Government of India

New/ separate petroleum exploration license and mining lease

Typical life cycle of an oil field

Initial development

Commencement of production

Reaching peak production level

Declining production level

Reaching a stage of

abandonment

Issues

Whether results in a newundertaking

What would be the year of

commencement of

commercial productionAp

plicabi

lityofMini

mumA

lternat

eTax


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Farm-Out: Taxation PrinciplesFarm-Out: Taxation Principles


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Farm-Out Taxation PrinciplesFarmFarm--OutOutTaxation PrinciplesTaxation Principles

Section 42(2)

Determines the taxability of proceeds from assignment of interest

(whole or in part) in PSC

Broadly based on the difference between the capital proceeds of

transfer and the expenditure remaining unallowed

Taxability envisaged under three scenarios:

Proceeds are less than the expenditure incurred remaining unallowed

Proceeds exceed the amount of expenditure incurred remaining

unallowed

Proceeds are equal to expenditure incurred remaining unallowed

CBDT circular gives the numerical depiction under the aboveCBDT circular gives the numerical depiction under the abovementioned three scenarios as discussed in following slidesmentioned three scenarios as discussed in following slides


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Taxability of considerationTaxability of considerationTaxability of consideration

Scenario A: Proceeds less than expenditure remainingScenario A: Proceeds less than expenditure remaining unallowedunallowed

Particulars Rs

(a)

(b)

(c) Proceeds of Transfer

(d)

(e)Excess of proceeds of transfer over exp.Remaining unallowed (c-b)

(f)Diff between the expenditure incurred and

exp remaining unallowed (a-b)

Exp. Incurred 100

Amount allowable as deduction (b-c)

Exp. Remaining Unallowed 60

(g) Amount chargeable to tax as P&GBP [Lower of e & f]

50

10

NIL

40

NIL


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Scenario B: Proceeds exceed expenditure remainingScenario B: Proceeds exceed expenditure remaining unallowedunallowed

Particulars Rs

(a)

(b)

(c) Proceeds of Transfer

(d)




Exp. Incurred 100




70NIL

10

40

10

100

60

150

NIL

90

40

40


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Scenario C: Proceeds equal expenditure remainingScenario C: Proceeds equal expenditure remaining unallowedunallowed

Particulars Rs

(a)

(b)

(c) Proceeds of Transfer(d)




Exp. Incurred 100




60NIL

NIL

40

NIL


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A simplistic approachA simplistic approachA simplistic approach

Section 42(2) provides for terminal allowanceSection 42(2) provides for terminal allowance

Scenario A

Proceeds of Transfer

Expenditure Incurred 100

Terminal Allowance


5010

B

100

60

700

C

100

60

1500

D

100

60

600


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Section 42(2) provides for balancing chargeSection 42(2) provides for balancing charge

Scenario A

Excess of sales consideration (A)

Sales consideration 50

Expenditure allowed (B)

Less: unallowed expenditure 60

040

B

70

60

1040

C

150

60

90

40

D

60

60

0

40

Balancing charge (lower of A & B) 0 10 40 0


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Capital gains provisions continue to applyCapital gains provisions continue to apply

Scenario A

(-) Terminal allowance

Sales consideration 50

(+) Balancing allowance

Cost of acquisition/ improvement

equivalent to unallowed expenditure60

10

0

B

70

60

0

10

C

150

60

0

40

D

60

60

0

0

Effective cost of acquisition/improvement

50 70 100 60

Capital Gains 0 0 50 0


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Farm-Out Tax IssuesFarmFarm--OutOutTax IssuesTax Issues

What constitutes capital proceeds of transfer?What constitutes capital proceeds of transfer?

What is expenditure incurred remainingWhat is expenditure incurred remaining

unallowedunallowed??

Taxability of sale considerationTaxability of sale consideration over and aboveover and above

covered under section 42(2)covered under section 42(2)

Taxation of cashless considerations, free carry andTaxation of cashless considerations, free carry and

production bonusesproduction bonuses


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Thank You!

Upstream Taxation India

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