Impact on Oil and Gas Sector

Transcription

1 Impact on Oil and Gas Sector

2 Executive summary The Indian Union Budget for containing the tax proposals and policy pronouncements of the Government was presented by the Finance Minister to the Parliament on 29 February The Finance Minister listed the nine pillars based on the theme of Transform India which governed the proposed policy measures and tax reforms. The Budget is aimed at reducing the corporate tax rates, dispute resolutions and laying down Government s overall commitment on the ease of doing business in India. This alert captures the key changes proposed by the Union Budget 2016 which impacts the Oil and Gas sector. Further, most direct tax proposals contained in the Finance Bill 2016 are effective from the Financial Year ( FY ) commencing on 1 April 2016, unless otherwise specified. Key policy initiatives Aimed at self-sufficiency, proposal to incentivize gas production from deep-water, ultra deep-water and high pressure-high temperature areas which are presently unexploited due to higher cost/ risks through two fold approach: Calibrated marketing freedom; and Ceiling price to be determined on principle of landed price of alternate fuels Boost to Public Private Partnerships ( PPP s) by way of a three point action plan viz. introduction of the Public Utility (Resolution of Disputes) Bill during , issuance of crucial guidelines for renegotiation of PPP Concession Agreements and introduction of new credit rating system for infrastructure projects. households in three years, as compared to overall 182 million households connected until end of FY Key Direct Tax proposals - Oil and Gas sector Exemption for income of foreign companies from storage and sale of crude oil stored as part of strategic reserves. With an aim to maintain strategic reserves of oil in India and ensure price stability for Indian oil companies, Indian Strategic Petroleum Reserves Limited ( ISPRL ) is in the process of setting up underground storage facility for storage of crude oil In order to encourage participation of private players like foreign national oil companies ( NOCs ) and multinational companies ( MNCs ) to store crude oil in India and to build up strategic oil reserves in India, it is proposed to exempt income of such foreign companies if: (a) such income accrues or arises on account of storage of crude oil in a facility in India and sale therefrom to any person resident in India; (b) storage and sale is pursuant to an agreement/ arrangement with the Central Government ( CG ) or approved by the CG; and (c) such foreign company and the agreement or arrangement is notified by the CG in this behalf This proposed amendment will take effect retrospectively from 1 st April, 2016 i.e. FY onwards. Phasing out of deduction for profits derived from production of mineral oil and natural gas (100% profit-linked) Proposed sunset clause whereby no deduction allowed if specified activity of production of mineral oil and natural gas commences on or after 1 April Government of India ( GOI ) has allocated INR 20,000 million in FY 2017 aimed to provide new Liquefied Petroleum Gas ( LPG) connections to Below Poverty Line ( BPL ) households in the rural India. Additionally, the GOI is targeting providing LPG connections to 15 million BPL households in FY 2017 and 50 mn BPL Key Direct Tax proposals - General Corporate income-tax rates No change in corporate tax rates for foreign and domestic companies, except taxpayers who are covered by below provisions Budget Connect

3 Option to new domestic manufacturing companies incorporated on or after 1 March 2016 to be taxed at 25% (plus surcharge and education cess); provided no profit or investment linked deduction or accelerated depreciation is claimed Specified services to cover online advertisements, provision for digital advertising space or any other facility or service for the purpose of online advertisements and other services to be notified Reduced corporate tax rate of 29% (plus surcharge and education cess) for domestic companies with turnover less than or equal to INR 50 million in FY Surcharge and Education cess to continue at existing rates for all corporate tax payers. Obligation has been imposed on the resident and non-resident having PE in India to deduct equalisation levy from the amount payable to the non-resident if aggregate amount of consideration exceeds INR 1,00,000 and deposit the same to the CG Applicability of Minimum Alternate Tax ( MAT ) to foreign companies MAT not applicable to all foreign companies provided: (a) no Permanent Establishment ( PE ) and from a country with which India has a Double Taxation Avoidance Agreement ( DTAA ); or (b) from a country with which India does not have a DTAA and company is not required to be registered under any other law [retrospective effect from FY ]. Non-corporate income-tax rates Failure to deduct or pay such equalisation levy will attract penalty. Also, the detailed provision for the appeal against the penalty order has bene provided in this Chapter Introduction of Country by Country ( CbC ) Reporting The Organization for Economic Co-operation and Development ( OECD ) released its final report on Action 13, Transfer Pricing Documentation and CbC Reporting under its Action Plan for prevention of Base Erosion and Profit Shifting ( BEPS ) in October No change proposed in tax rates for noncorporate taxpayers. Surcharge rates proposed to be increased from 12% to 15% for non-corporate taxpayers having total income exceeding INR 10 million. The Government of India ( GOI ) in order to meet with its commitment to BEPS initiative of the OECD and G-20, has proposed to implement the BEPS Action Plan 13. Applicability of the CbC reporting requirement Education cess to continue at existing rates for all non-corporate taxpayers. Maximum marginal tax rate for individuals to go up to % from % on account of increase in surcharge CbC reporting requirements apply only if the consolidated revenues of the preceding year of the group, based on consolidated financial statements exceeds equivalent local currency of EUR 750 million (equivalent to approximately INR billion at the current rates). New equalization levy to address challenges of the digital economy (to come into force once notified) Introduction of new equalisation levy at 6% on amount received by a non-resident for specified services provided to a resident in India or a non-resident having a PE in India Who is required to furnish the CbC report? If the parent entity or the alternate reporting entity is a resident in India, then such entity shall furnish the report to the prescribed authority on or before the due date of filing of return of income (ROI) for the relevant accounting year. Budget Connect

4 Such report shall inter-alia include amount of revenue, profit or loss before income tax, amount of income tax paid and accrued, stated capital, accumulated earning, number of employees, tangible assets, nature of business activity of each group entity, etc. If the parent entity of the group is not a resident in India, the Indian entity of the group is required to notify the prescribed income-tax authority, the details of the parent entity or the alternate reporting entity (i.e. entity designated to furnish the report on behalf of the parent). In case where the parent entity or the alternate reporting entity is a resident of a country with which India does not have an arrangement for exchange of the CbC report or such country is not exchanging information with India even though there is such an agreement, the Indian entity of the group shall be required to furnish the CbC report. If there are more than one entities of the same group in India, the group can nominate one entity that shall furnish the CbC report on behalf of the group. General Anti Avoidance Rules ( GAAR ) GAAR was introduced by the Finance Act, 2012 with the objective of dealing with aggressive tax planning through the use of sophisticated structures and codifying the doctrine of substance over form. The GAAR provisions were initially introduced to be effective from 1 April 2013 however the applicability of the provisions was deferred by the Finance Act, 2013 to 1 April 2015 and subsequently to 1 April 2017 by the Finance Act, The Finance Minister, in his budget speech has reiterated the GOI s commitment to implement GAAR from 1 April 2017 (i.e. FY onwards). Buyback tax ( BBT ) scope widened BBT applicable on buybacks undertaken under any law governing companies as against being restricted to buyback under section 77A of Companies Act, 1956 under existing provisions Rules/ mechanism to compute amount received on issue of shares under various scenarios to be prescribed subsequently The format and manner in which the documentation is required to be furnished shall be notified by way of Rules. The proposed amendment to apply to buy back transactions undertaken on or after 1 June 2016 Penalty Graded heavy penalty structure prescribed for non-furnishing of the report New concessional taxation regime for income from patents To encourage Research & Development ( R&D ) activities in India and make India a global R&D hub, the GOI has proposed concessional taxation regime for royalty income from patents. Dividend received by Individuals, HUFs and Firms Currently, dividend is exempt in the hands of the shareholder on which dividend distribution tax is paid Now, it is proposed that dividend income from domestic companies received by resident Individuals, HUFs, LLPs and Firms in excess of INR 1 million 10% without allowing set-off against any losses and deduction of any expenditure It has been proposed that royalty income earned by an Indian resident from a patent developed and registered in India shall be taxable on a gross basis at the rate of 10% (plus applicable surcharge and education cess) The proposed amendment to take effect in respect of dividends earned on or after 1 April 2016 Budget Connect

5 Deferral of Place of Effective Management ( POEM ) based residence test for foreign companies As a taxpayer friendly measure and based on inputs from stakeholders, POEM based rule of residence now proposed to be deferred by one year i.e. applicable from FY onwards Transition mechanism to be provided for a foreign company which has not been previously assessed in India which would cover issues relating to computation of income, treatment of unabsorbed depreciation, set-off of losses, etc Furnishing of Permanent Account Number ( PAN ) to non-residents Incremental withholding tax for nonresidents not having a PAN has been removed subject to satisfaction of certain conditions (to be prescribed) Illustratively, conditions could include furnishing Tax identification Number or Tax Residency Certificate, etc. The proposed amendment to apply from 1 June 2016 Conversion of a Company into Limited Liability Partnership ( LLP ) Existing law provides for non-taxability of conversion of a private limited or unlisted public company into LLP subject to fulfilment of conditions viz. gross receipts, turnover or sales in any of the preceding 3 years did not exceed INR 6 million Additional conditions now introduced whereby the value of the total assets in the books of accounts of the company in any of the 3 previous years preceding the previous year in which the conversion takes place, should not exceed INR 50 million. Direct Tax Dispute Resolution Scheme, 2016 The Direct Tax Dispute Resolution Scheme, 2016 to reduce backlog of cases and increase tax recovery, introduced: Covers matters pending before Commissioner of Income-tax (Appeals) ( CIT(A) ) as on 29 February 2016 against an assessment or penalty order Eligible declarant to pay tax and interest (up to the date of assessment order). 25% of minimum penalty shall also be paid where tax in dispute exceeds INR 1 million In case of pending appeal against penalty order, 25% of minimum penalty leviable to be paid along with tax and interest as applicable Consequent to such declaration, appeal deemed to be withdrawn and declarant to waive right to any further recourse. Immunity from prosecution and further penalty to be granted A declaration can also be made in respect of tax determined pursuant to a retrospective amendment, where the matter is pending before CIT(A), Income-tax Appellate Tribunal ( ITAT ), High Court, Supreme Court or arbitration conciliation / mediation. In such cases, eligible declarant only to pay disputed tax Other measures aimed at reducing litigation and speedy redressal Revenue not to file appeal against DRP orders from 1 June 2016 To expedite Single member bench of ITAT to dispose off cases where total income computed by Assessing Officer ( AO ) is less than or equal to INR 5 million Time-limit for ITAT to rectify mistake apparent from record at any time within six months from the end of the month in which the order was passed as against exiting time-limit of 4 years from the date of order Amnesty scheme w.r.t undisclosed income One time amnesty scheme in respect of voluntary undisclosed income up to FY subject to payment of tax at 30% plus surcharge of 25% of tax payable. Further penalty of 25% of tax payable to also be levied on such undisclosed income (total outgo will be 45% of undisclosed income) Scheme to provide exemption from Wealth tax and enquiry under Income-tax Act/ Wealth tax Act, immunity from prosecution Budget Connect

6 under Income-tax Act, 1961 and immunity under Benami Transactions (Prohibition) Act, 1988 Certain cases not to be eligible for the above scheme for example cases where notice for scrutiny is issued and case is pending before AO, information received under agreement with foreign countries, cases covered under Black Money Act 2015, Indian Penal Code etc Other key tax proposals Rationalization of the withholding tax threshold limits and reduction in withholding tax rates on various payments to residents from 1 June 2016 onwards Reduced time-limits for completing tax assessments, reassessment and penalty proceedings Legal framework for paperless assessment and automation of various processes introduced Interest on refund will also be allowed on self-assessment tax. Further, an additional 3% interest in cases where order giving effect to appeal is delayed beyond prescribed time-limit. The amendment proposed to be made effective from 1 June In line with recommendations of Easwar Committee, provisional attachment of property (as per existing provisions) can now be substituted by bank guarantee from a scheduled bank at a value arrived at by valuation officer upon reference by AO The Finance Minister in the budget speech announced that the tax department is issuing instruction making it mandatory for the AO to grant stay of demand once the assesse pays 15% of the disputed demand, while the appeal is pending before Commissioner of Income-tax (Appeals). Accordingly, the Central Board of Direct Taxes has now issued guidelines dated 29 February 2016 modifying the Instruction No dated 21 March 1996 to provide that the AO shall grant stay of demand till disposal of first appeal on payment of 15% of the disputed demand. In case of deviation, AO has to get orders of his superiors. The taxpayer also has an option to approach the superior officer where the taxpayer does not agree with conditions of stay order passed by the subordinate officer. Substitution of concealment penalty provisions Penalty on account of concealment or furnishing inaccurate particulars of income to be governed by existing provisions applicable to assessments for financial years upto 31 March 2016 New penalty provisions to be applicable from FY onwards, whereby penalty to be levied in cases of underreporting and misreporting of income: New provisions identify cases to be covered as underreporting and misreporting of income as well as the mechanism to compute the same Rate of penalty: (a) 50% of tax payable on under reported income; (b) 200% of tax payable on misreported income Immunity from new penalty/ prosecution upon an application by taxpayer provided he pays tax and interest as per assessment/ reassessment order. Subject to fulfilment of conditions, the AO to accept or reject immunity application. Key indirect tax proposals Service tax Effective rate of tax on services increased from 14.5% to 15% Krishi Kalyan Cess at 0.5% introduced on any or all the taxable services to be effective from 1 June 2016 CENVAT credit allowed to be used against output cess liability (notification awaited) Swachh Bharat Cess at 0.5% continues to be non-creditable Ocean freight for import consignments is liable to service tax with effect from 1 June 2016 Value of service for renting of motor cab to avail prescribed abatement should include the cost of fuel effective from 1 March 2016 Budget Connect

7 All services received from Government taxable under reverse charge mechanism (i.e. service recipient to pay service tax) 1 April 2016 Uniform rate of interest of 15% on delayed payment of all indirect taxes (service tax, customs and excise) - except Service tax collected but not deposited (to attract 24%) - (Service tax - effective from the date of assent of Finance Bill, 2016, Customs and Excise effective from 1 April 2016) Rule 6 of Cenvat Credit Rules, 2004 redrafted for simplification and rationalisation of the procedure for reversal Existing Rule 6 to continue up to 30 June 2016, for units who are required to discharge the obligation for financial year Cenvat credit to be reversed on common inputs/ input services used in providing taxable output services and an activity which does not qualify as service Annual service tax returns prescribed to be filed by 30 November (effective from 1 April 2016) Limitation period for issuing notices for recovery of Service tax not levied/ shortlevied/ short-paid/ erroneously refunded (for cases not involving fraud/ collusion/ suppression) extended from 18 months to 30 months - (effective from the date of assent of Finance Bill, 2016) Limit for launching prosecution raised to INR 20 million for Service tax evasion - (effective from the date of assent of Finance Bill, 2016) Power to arrest to be restricted only to situations where tax has been collected but not deposited with the exchequer and the value of such tax is more than INR 20 million - (effective from the date of assent of Finance Bill, 2016) Cenvat credit applicable from 1 April 2016 unless otherwise specified Theme aimed at rationalization Customs Duty General rate of Basic Custom Duty ( BCD ) maintained at 10% Additional custom duty ( ACD ) and Special Additional custom duty ( SAD ) also maintained Exemptions available to Oil and gas operations is streamlined under one single entry (the said exemption is being extended on imports of goods required for exploration & production of hydrocarbon activities undertaken under Petroleum Exploration Licenses ( PEL ) or Mining Leases ( ML ) issued or renewed before 1st April 1999 also) effective from 1 March 2016 Simplified procedure for availing BCD, ACD and SAD exemption on Maintenance, repair and overhaul ( MRO ) for ship repairs subject to actual user condition - effective from 1 March 2016 Deferred payment of custom duty for identified class of importers and exporters - (notification not yet issued) Items available for credit expanded example office equipments All capital goods having value up to INR 10,000 included in the definition of inputs in order to avoid deferment of 50% credit to subsequent year Simplified Baggage Rules introduced effective from 1 April 2016 Filing of declaration mandated only for passengers carrying dutiable or prohibited goods Provisions with regard to utilisation based on First-in-First-out basis now deleted (effective from 1 April 2016) Updation in provisions allowing credits to person having both taxable and exempt supplies in order to provide greater clarity Limitation period for issuing notices for recovery of Customs duty / excise duty in cases not involving fraud, suppression of facts etc extended from 12 months to 24 months - (effective from the date of assent of Finance Bill, 2016) Budget Connect

8 Central Excise Duty General rate of excise duty maintained at 12.5% Oil Industries Development Cess levied on domestically produced crude oil under the Oil Industry (Development) Act, 1974 is reduced from INR 4500 per MT to 20% ad valorem (effective from the date of assent of Finance Bill, 2016) The Schedule Rate of Clean Energy Cess, (renamed as Clean Environment Cess) levied on coal, lignite and peat, is increased from INR 200 per tonne to INR 400 per tonne - effective from 1 March 2016 Central Sales Tax Co-mingled and fungible gas transported through a common carrier pipeline or any other transportation medium which moves from one state to another shall be deemed to be movement of goods from one state to another (from a date to be notified). Others Indirect Tax Dispute Resolution Scheme, 2016 (effective from 1 June 2016) Applicable to Customs, Excise and Service tax laws Dispute pending before Commissioner (Appeals) for cases of tax / duty up to INR 5 million Payment of tax, interest and 25% penalty to close proceedings and immunity from prosecution 11 new benches of Customs Excise and Service Tax Appellate Tribunal to be established to reduce pendency Budget Connect

9 The Union Budget 2016 revolved around the theme of Transform India with nine distinct pillars. The specific policy measures and initiatives are aimed to have a transformative impact on the Indian economy. The Finance Minister in his Speech highlighted potential of Indian natural resources (including oil and gas) and its aim towards self-sufficiency. The GOI s proposal to incentivize gas production from deepwater, ultra deep-water and high pressurehigh temperature areas by providing calibrated marketing freedom and reduction in Oil Industries Development Cess is a welcome step to the otherwise sombre oil and gas industry. The stress on measures to Boost PPPs will also provide impetus to the oil and gas industry.

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