Profit petroleum may be exempt from levy of GST:

Profit petroleum may be exempt from levy of GST:

Context:

The oil and gas exploration and production business is likely to get a boost following a proposal to exempt the profit petroleum paid to the Centre from the Goods and Services Tax (GST).

Introduction:

• The production sharing contracts (PSCs) signed for exploration and development of oil fields require operators to pay a pre-determined share of the surplus petroleum output to the Centre as a form of royalty.
• Presently, such profit petroleum is subject to GST as it has been construed as a payment made by firms for a service.
•  The levy of GST doesn’t appear to be sync with the PSCs signed under the New Exploration Licensing Policy
• The proposal to rectify this policy is likely to be taken up by the GST Council at its next meeting in September.

Key points:

• The PSC allows contractors to recover all expense incurred in exploration, development, production, and this includes costs of all inputs and indirect taxes paid thereon.
•   Operators are not allowed to recover the profit petroleum paid to the government as a cost under the PSC.
• Industry bodies like CII had made several representations on the issue to the Centre, contending that paying a share in profit petroleum to the government is a profit-sharing arrangement rather than a payment for service.
•  Profit petroleum is a bidding parameter for player under the NELP regime and they are required to share varying amounts of the surplus oil drilled beyond a particular threshold with the government.
• The government is also likely to clarify that ‘cost petroleum’ which is the value of petroleum that a contractor can take in order to recover all contracts costs for exploration and royalty incurred during a year could be taxable.

New policy:

•  The government recently has approved HELP (Hydrocarbon Exploration and Licensing) Policy which will replace the existing NELP.
• Under the new regime revenue-sharing arrangement is proposed.
•  The new policy HELP replaces the previous policy regime for exploration and production of oil and natural gas, known as New Exploration Licensing Policy (NELP).
• Under the new regime will be a uniform licensing system which will cover all hydrocarbons, under a single license and policy framework.