India Proposes Gas Tax Incentives

NEW DELHI -- India's federal government Monday proposed to reinstate tax breaks for natural gas production and offer full tax exemption for its transportation as part of efforts to boost supplies of the cleaner-burning fuel to homes, factories and automobiles.

It also proposed to build a national gas grid to transport gas around the country and to review India's system of setting gasoline, diesel and kerosene prices, Finance Minister Pranab Mukherjee said in his budget speech for this fiscal year.

Companies building gas pipelines will get 100% tax exemption on their capital expenditure, Mr. Mukherjee said.

"With the recent find of natural gas in the KG basin...the indigenous production of natural gas is set to double," he said, in a reference to the start of output from Reliance Industries Ltd.'s D6 block in the Krishna Godavari basin, off India's east coast.

"LNG (liquefied natural gas) infrastructure in the country is also being expanded," the minister noted.

Energy companies welcomed the decision to reintroduce the seven-year tax break for natural gas production and the construction of a nationwide pipeline network.

"The oil and gas sector stands to benefit," said R.S. Sharma, Chairman of Oil & Natural Gas Corp., the nation's biggest oil producer by sales.

"It will propel fresh investment in natural gas production with uncertainty removed on tax benefits," he said.

The news was also welcomed by GAIL (India) Ltd., India's biggest gas distributor by sales.

"The gas grid is a big positive for the sector," R.K. Goel, GAIL's director in charge of finance, told Dow Jones Newswires. "GAIL can easily build the gas highway as we have the required expertise in the sector. We are ready for that."

In 2008, then finance minister P. Chidambaram withdrew the seven-year income-tax holiday for gas producers, while retaining it for oil producers.

India plans to expand its natural gas pipeline network by nearly 70% to 17,000 kilometers over the next five years, B.S. Negi, a member of the downstream regulator Petroleum and Natural Gas Regulatory Board said in April.

The minister Monday also proposed extemdomg the timeframe for tax breaks for starting new refineries by private refineries by three years to March 31, 2012.

"The notice given to private sector entrepreneurs to complete the execution of their refinery project was extremely short," Mr. Mukherjee said. "As a result, entrepreneurs who had undertaken substantial investment in anticipation of the tax holiday suffered serious financial setback."

Mr. Mukherjee also proposed setting up a panel of experts to advise on retail pricing of petroleum products as global crude oil recover from lows seen early this year.

Crude oil prices, still less than half the levels seen in July last year, have risen nearly 75% since India cut prices of gasoline, diesel and cooking gas in late January.

This prompted the government on July 1 to raise diesel prices by 2 rupees ($0.04) per liter and gasoline by 4 rupees per liter.

"It is important, to recognize that, with almost three-quarters of our oil consumption met through imports, domestic prices of petrol and diesel have to be broadly in sync with global prices of these items," Mr. Mukherjee said.

The panel will advise "on a viable and sustainable system of pricing petroleum products," he said, adding details will be announced later by the Petroleum and Natural Gas Minister.

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