[INDIA] Essar refinery slips on JV clause, may miss tax sops

Essar Oil’s refinery expansion project at Vadinar may turn out to be the only such upcoming project to be denied a 100% tax holiday available to refinery projects. This follows the finance ministry’s decision which allows refinery projects to enjoy the tax holiday only if they have a joint venture with a public sector company that holds a 49% stake.

This has impeded Essar’s Rs 24,000-crore Vadinar refinery expansion project which was initiated a year ago. While extending the sunset clause for the tax holiday to 2012, the finmin made it mandatory for a private refinery to have at least 49% of a public sector entity to become eligible for the exemption. The new rule, while allowing tax benefit to LN Mittal’s Bhatinda refinery project (in which HPCL has a 49% stake), denies the same to Essar. The PMO is understood to have taken up a review of the tax provisions in the oil sector.

According to a finmin notice, the provision for income-tax exemption has been withdrawn for companies refining mineral oil on or after April 1, 2009. It, however, made an exception for such projects that are notified by the government on or before May 31, 2008, owned by a public sector company or have at least 49% PSU investment and begins refining not later than March 31, 2012.

The new rule, however, allows the tax benefit to RIL (29 MMTPA) as it is scheduled to start refining much before the April 1, 2009, deadline. Other major refinery projects in Bina (6 MMTPA) and Paradip (15 MMTPA) qualify for the tax benefit for being 100% owned by public sector companies BPCL and IOC, respectively.

An oil ministry official said the new rule would make the Essar’s project unviable. According to a ministry’s calculation, new refineries would be required to earn margins of at least $10/barrel to service their capital needs alone. To cover operational costs, a margin of another $3-4/barrel is required. Thus, a new refinery would have to earn a gross margin of approximately $13-14/barrel to be financially viable. Without the tax benefit, new refineries would lose the competitive advantage.

It is learnt that Essar has approached the prime minister, seeking his intervention as the company’s financial interests would be jeopardised. Essar has already placed orders for equipment worth Rs 12,000 crore, a company official said. In a letter to the PM, the company said: “There is no justification for depriving a private sector industrial undertaking engaged in the business of refining of mineral oil from the benefit of the said deduction, while other refineries continue to enjoy the benefits.”

Sub-section 9 of the Section 80-IB of the IT Act provides for a seven-year income-tax holiday to commercial entities refining mineral oil. Budget 2008 proposed to withdraw the exemption from March 31, 2009. As many companies had already announced their plans to set up refineries, the FM decided to extend the deadline to March 31, 2012, with specified conditions.

Source: India Economic Times|by Rajeev Jayaswal

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