Areas of Service
Oil & Natural Gas
GENERAL INDUSTRY BACKGROUND
Union Govt., under the Constitution of India, 1950 (“Constitution”) has the power to legislate in respect of O&NG. Legislative powers are conferred on the Union Govt. under Entry 53, to List I of Schedule VII of the Constitution.4
From an industry perspective, O&NG industry is divided into three major sectors:
IMPORTANT TRENDS IN THE INDUSTRY
The major industry players in India’s O&NG sector currently are:
Further, the key players globally are: Gazprom (Russia), Rosneft (Russia), Exxon Mobil (USA), PetroChina (China), British Petroleum (BP), Royal Dutch Shell (Netherlands), Chevron (UK), Petrobras (Brazil), Lukoil (Russia), Total (France).
VARIOUS LAWS APPLICABLE TO THE O&NG INDUSTRY IN INDIA
TAX LAWS AFFECTING THE O&NG INDUSTRY
Resident companies are taxed at the rate of 34.61% (rates mentioned herein are the maximum effective rates inclusive of applicable surcharge and education cess and secondary and higher education cess) and non-resident companies are taxed at the rate of 43.26% on net taxable income. While residents are taxed on their worldwide income, non-residents are only taxed on income arising from sources in India. A company is said to be resident in India if it is incorporated in India or if its place of effective management for that year is in India. A minimum alternative tax is payable at the rate of around 21.34% (18.5% plus surcharge, education cess and secondary and higher education cess) if the Non-Resident has a Permanent Establishment in India.
Non-residents in the business of supplying plant, machinery, facilities or services in connection with prospecting or extraction of mineral oils are subject to a presumptive tax regime, wherein taxable profits are deemed to be 10% (plus surcharge and education cess) of the gross revenues.
A number of special allowances and incentives have been provided which are relevant to the oil and gas industry in India:
Dividends distributed by Indian companies are subject to a dividend distribution tax at the rate of 20.36% payable by the company. However, no further Indian taxes are payable by the shareholders on such dividend income once dividend distribution tax (“DDT”) is paid. Having said that, a shareholder being an individual or Hindu Undivided Family (“HUF”) is taxed at 10% if the aggregate amount of dividend received in a year exceeds INR 1 million. An Indian company would also be taxed at the rate of 23.07% on gains arising to shareholders from distributions made in the course of buy-back of shares.
Tax on capital gains depends on the period of holding of a capital asset. Short term gains may arise if the asset is held for a period lesser than 3 years (or 1 year for listed securities and 2 years for unlisted shares). Long term gains may arise if the asset is held for a period more than 3 years (or 1 year for securities listed securities and 2 years for unlisted shares). Long term capital gains earned by a non-resident on sale of unlisted securities may be taxed at the rate of 10.81%. Long term gains on sale of listed securities on a stock exchange is exempt, and only subject to a securities transaction tax (“STT”). Short term gains earned by a non-resident on sale of listed securities (subject to STT) is taxable at the rate of 16.22%, or at ordinary corporate tax rate with respect to other securities. India also has taxes non-residents on the transfer of foreign securities the value of which are substantially (directly or indirectly) derived from assets situated in India, (for this purpose more than 50% of the value of the foreign share must be derived from assets located in India).
Tax would have to be withheld at the applicable rate on all payments made to a non-resident, which are taxable in India. The obligation to withhold tax applies to both residents and non-residents. Withholding tax obligations also arise with respect to specific payments made to residents. Failure to withhold tax could result in tax, interest and penal consequences.
Double tax avoidance treaties
India has entered into more than 80 treaties for avoidance of double taxation. A taxpayer may be taxed either under domestic law provisions or the tax treaty to the extent it is more beneficial. A non-resident claiming treaty relief would be required to file tax returns and furnish a tax residency certificate issued by the tax authority in its home country. Certain tax treaties such as the treaties with Mauritius, Singapore, and Netherlands provide significant relief against Indian withholding tax on capital gains and interest income in specific circumstances. However, recently the tax treaty with Mauritius has been amended to remove the capital gains relief on shares in Indian companies acquired after April 1, 2017. The Singapore tax treaty is also expected to be amended along similar lines. Having said that, the Mauritius tax treaty has also been amended to provide significant relief against Indian withholding tax on interest income.
A number of specific anti-avoidance rules are enforced in India. Cross-border transactions between related parties would be viewed for tax purposes on an arm’s length basis. Transfer pricing rules apply to certain domestic transactions as well. India does not have any thin capitalization rules at the moment. However, effective from April 1, 2017 wide general anti-avoidance rules (“GAAR”) shall be implemented to tax or disregard certain ‘impermissible avoidance arrangements’ that are abusive or lack commercial substance. GAAR is likely to impact some of the conventional tax optimization structures for India. It has also been clarified that while structures in place before April 1, 2017 will be grandfathered, continuing violations may not be allowed. Hence there is some ambiguity in that respect.
Indirect taxes are imposed at the federal and state level. This includes service tax, customs and excise duty, value added tax (“VAT”) and central sales tax. Service tax is payable by the service provider at the rate of 15% on all services except for services specified in a negative list. Services provided outside the taxable territory of India is not subject to service tax. The rate of customs, excise duty and VAT varies depending on the product. Certain petroleum products may be subject to additional duties. India is in the process of introducing a goods and services tax (“GST”) to consolidate and harmonize all indirect taxes on a value added basis. The Parliament has recently passed a constitutional amendment introducing GST, which should be ratified by at least half of the state legislatures in India. The implementation of GST will also require the cooperation of the central and state governments, which is still awaited. Once implemented, it is expected that many of the state taxes and central taxes will be subsumed into the GST tax. However, there are petroleum products are likely to be kept out of the GST regime for a while at least.
It must be noted that from an economical and financial perspective, investment in O&NG is lucrative with substantial prospects in India. Given the growing demand for crude oil in India and its wide application in household and industrial activities, it would be seen that demand for this investment is not likely to decline in India. While the Union Govt. resolves teething issues in the O&NG sector, the landscape in the O&NG sector promises to be dynamic with scope for growth for business entities and development of the sector.
1 Source: http://indiainbusiness.nic.in/newdesign/index.php?param=industryservices_landing/345/1 (Accessed on August 19, 2016)
2 Source: http://www.petroleum.nic.in/docs/pngstat.pdf (Accessed on August 19, 2016)
3 Source: http://www.petroleum.nic.in/docs/pngstat.pdf (Accessed on August 19, 2016)
4 Regulation and development of oil fields and mineral oil resources; petroleum and petroleum products; other liquids and substances declared by Parliament by law to be dangerously inflammable. (Accessed on August 19, 2016)
5 Source: http://www.ft.com/cms/s/0/bacac870-4f46-11e6-8172-e39ecd3b86fc.html#axzz4HmVvPVE3 (Accessed on August 19, 2016)
6 Source: http://auto.economictimes.indiatimes.com/news/oil-and-lubes/india-in-drivers-seat-as-fuel-demand-roars-at-fastest-rate-ever/51450783; http://www.bloomberg.com/news/articles/2016-04-13/india-s-fuel-demand-rises-to-record-on-gasoline-diesel-growth (Accessed on August 19, 2016).
7 Source: http://indiainbusiness.nic.in/newdesign/index.php?param=industryservices_landing/345/1 (Accessed on August 19, 2016).
8 Source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=137638 (Accessed on August 19, 2016).