Issues

Section

Present Position

Proposed Changes

Implications

Corporate Taxation

Reduction in Corporate Tax Rate in Finance Act, 2018  

In Budget 2015 Honorable Finance Minister proposed a phased reduction in corporate tax rate along with phased elimination of exemptions. In Budget 2016 a plan of phasing out exemptions was announced; however Corporate tax rate was lowered only for new manufacturing companies and relatively small enterprises.

It is recommended to reduce the corporate tax rate from existing 30% to 28%.

Phasing out exemptions include accelerated depreciation being limited to 40% from 01.04.2017 which will be impacting the corporate profitability.

Impact of proposed change will be deferment of tax depreciation to the tune of Rs.717 crores approx. which will result in excess tax outflow of Rs.248 crores during FY 2017-18.

Investment Allowance

Section 32AC

The Investment Allowance under Section 32AC of the Income Tax Act, 1961 (which promotes growth in the area of manufacture) was available for investments made in plant and machinery from 01/04/2015 to 31/03/2017. However to promote Make in India initiative the deduction should be extended upto 31.03.2019.

The investment Allowance may please be extended up to 31.03.2019 i.e. the clause of acquiring and installation may be made applicable for the period 01.04.2017 to 31.03.2019, at least for large projects and substantial modification in existing plant to ensure that large size projects become eligible to avail the deduction. Further it should be clarified that installation can be in subsequent years.

The company is implementing a major capacity expansion project at its Kochi Refinery in Kerala State from present 9.5 MMTPA to 15 MMTPA. The Propylene Derivatives Petrochemical Project (PDPP) under this expansion plan envisages production of 47 TMT of Acrylic acid, Acrylates viz. 180 TMT of Butyl Acrylate, 10 TMT of 2 Ethyl Hexyl Acrylate and Oxo Alcohols viz. 38 TMT of Normal Butanol, 47 TMT of 2 Ethyl Hexanol and 7 TMT of Iso Butanol. The identified products are predominantly being imported and hence this project promotes the "Make in India" initiative under the Petrochemicals category of the Chemicals Sector as notified by Government of India. The estimated cost of the project is approx. Rs. 4600 crores.

However, considering the high capital investment for this pioneering petrochemical venture, it would be difficult to remain competitive unless adequate support is received from Central Government by tax deduction in form of Investment allowance.

100% Depreciation allowance for Projects undertaken for upgradation of fuel quality

Section 32

Under the Auto Fuel policy, the Govt. has directed oil companies to supply High Speed Diesel with minimum prescribed Sulphur content. Now as per proposed Auto Fuel Policy of Government, Oil companies are required to provide the HSD with maximum Sulphur content of 0.005% (BS-IV) with effect from 01.04.2017 throughout the country. Huge capital investment is required to be undertaken so that they can comply with the Directives of the Govt. Such reduction of Sulphur content helps to reduce the Air Pollution. As per Section 32 of the Income Tax Act, 1961 the assessee who are engaged in the Business or Profession are allowed the Depreciation Allowance in respect of assets used in Business or Profession. Rule 5 of the Income Tax Rules along with Appendix-1 provides for the rate of deprecation on various categories of assets. As per this rule, 100% depreciation allowance is admissible in respect of air/ water pollution control equipments.

Upgradation of Refinery to help reduce the Air Pollution by limiting the Sulphur content from fuel, the expenditure incurred on this should be made eligible for 100% Depreciation under Section 32.

Government in a move to fight pollution is going to implement BS VI norms by 1 st April, 2020 in order to comply with these norms huge outlay of more Rs. 5000 crore is estimated.

Such reduction of Sulphur content helps to reduce the Air Pollution.

200% Weighted tax deduction in respect of in-house R&D Centre

Section 35(2AB)

Finance Act, 2016 has amended section 35(2AB) so as to reduce the weighted deduction to 150% w.e.f. FY 2017-18 and 100% w.e.f. FY 2020-21.

In order to encourage research, it is recommended to extend the weighted deduction of 200%.

Weighted deduction of 200% should be allowed to boost corporate for increase in Research and development in India. This will also help in achieving Make in India Program by providing incentive for promoting innovation. This would also be in line with the government policy of encouraging innovation and R&D.

We shall be incurring substantial expenditure on R&D in the current year which is going to increase further in future years on account of undertaking of extensive research on Non-Renewable Energy resources and Biofuels.

Disallowance of expenditure incurred in relation to exempt income

Section 14A

As per provisions of Sec. 14A of the Act, the expenditure which is incurred in respect of exempt income shall not be allowed while calculating the Income of the assessee. Rule 8D (Inserted with effect from 24.03.2008) as amended by Finance Act 2016 provides for the method of calculating the amount of expenditure incurred in case of exempt income. Disallowance u/s 14A read with Rule 8D is aggregate of the following amounts:

- Expenditure directly attributable to exempt income.

- 1% of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income

Section 14A may be amended to provide that if the investments in assets which yield tax free income are made out of own funds such as share capital, free reserves etc. then the addition under this Section should not be made.

Further, without prejudice to above even if rule 8D is applicable, there should be an upper limit based on certain percentage of exempt income and not the total expenditure claimed by Assessee.

Even though the investments made in assets generating exempt income are out of Own funds of the Company, the Income Tax Dept. is not accepting the fact and have made heavy additions under this Section for the years where assessment has been completed.

Estimated disallowance for F.Y. 17-18 will be Rs. 93.17 crores on dividend income which amounts to double taxation.

Amendment in Section 35AD, Deduction in respect of expenditure on specified business

Section 35AD

Under the existing provisions of section 35AD of the Income-tax Act w.e.f. 01.04.2010, investment-linked tax incentive is provided by way of allowing 100% deduction in respect of any expenditure of capital nature (other than on land, goodwill and financial instrument) incurred wholly and exclusively, for the purposes of the "specified business". The ‘specified business' include the business of laying and operating a cross country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network. The incentive is available if the project of cross country pipeline is approved by Petroleum & Natural Gas Regulatory Board and is being operated on common carrier principle. The crude oil pipeline dedicated for the Refineries and also dedicated product and gas pipelines for customer are inadvertently getting excluded.

It is suggested that the approval of PNGRB for the common carrier principle may please be waived off. Further these pipelines are capital intensive projects and the revenue generation for break even from this project will require substantial time. Therefore it is also requested to remove the condition imposed in Section 73 for carry forward and setoff of losses from specified business

As per sec 73 the carry forward and setoff of loss from such specified business can be set off against the same business.

Treatment of gain or loss on account of Foreign exchange fluctuation on foreign currency loan for import of asset

Section 43A

Sec 43A allows actual foreign exchange gain or loss on foreign loans taken for imported assets to be adjusted to the block of assets, However the act is silent on treatment on indigenous asset acquired out of foreign loans which is resulting in uncertainty on treatment to be given on such foreign exchange losses.

It is suggested that clarification be incorporated that section 43A is applicable irrespective of the fact whether indigenous asset are acquired or imported assets are acquired from foreign loans.

More clarity on treatment to be given on such foreign exchange losses.

Amendment in Section 80-IA

Section 80-IA

Deduction u/s 80IA in relation to power generating plants is available only if the undertaking begins to generate power on or before 31 st March, 2017.

It is suggested to extend sun-set clause to 31 st March, 2019

To ensure India becomes a Power Surplus country by 2019. Moreover the above deduction should be provided to promote generation of power from renewable resources such as Solar Power Plant or Wind Mills.

Depreciation on Energy efficient LED Lights

Section

32

With the government objective of reducing energy consumption by increasing use of LED Lights the depreciation schedule should also include LED Lights under energy efficient equipment's to be eligible for accelerated depreciation.

It is suggested to include LED lights under energy efficient equipment's category.

This will help in optimum utilization of energy and reduction in energy comsumption.

Personal Taxation

Perquisite tax on housing accommodation provided to employees of CPSE'S

Under rule 3(1)

The valuation of perquisite on rent free accommodation is currently divided in to two categories:

- central and state government employees : Valuation is equal to license fee charged for such accommodation as reduced by rent actually paid by employee.

- other employees (including employees of PSU's /PSEs) on company owned/ leased accommodation is based on three slabs 15%/10% and 7.5% effective from 01.04.2006 by Finance Act,2007 based on the population of the location, as per census of 2001.

We recommend removing the distinction between employees of Central / State Government and CPSEs in the matter of Housing Perquisite Tax and providing for the same type of treatment to both these category of employees.

The discrimination between employees of Central/ State Government and those of CPSEs with regard to Housing Perquisite Tax, has led to widespread discontent amongst employees of CPEs as deduction of Housing Perquisite Tax based on valuation of 15%, 10%, 7.5% (depending upon population of cities) of annual salary has eroded the income of employees substantially, more so, since for the purpose of annual salary, various components like Pay, Allowances, Bonus or any monetary payment by whatever name called are taken into account.

The gap between the earnings of CPSE employees occupying company accommodation and those on HRA is widening. Besides, the heavy incidence of Housing Perquisite Tax has been a long standing grievance of employees in CPEs who are occupying company accommodation.

Stepping up the exemption on allowances

Section 10(14)

As per current tax laws, children education allowance, hostel allowance are tax exempt up to a nominal amount of Rs. 100, Rs. 300 per month respectively.

The new limits can be set at Rs. 1,000 for children education, Rs. 2,000 for hostel allowance.

These limits have not changed in a decade and it's time that these are revisited as expenses towards the same have increased drastically.

Raising the reimbursement limit for medical expenses

Section 17(2)

Salaried individuals are currently entitled to a tax exemption of Rs. 15,000 on medical reimbursement.

In view of the spiraling medical costs, increasing this limit to Rs. 50,000 u/s 17(2) would provide some respite.

Overall limit for Deduction

Section

80CCE

An increase in Section 80CCE to Rs. 300,000/- would definitely help in mobilization of savings and forced investments in various income generating options

It is recommended to increase the limit to Rs.300,000/- u/s 80CCE.

Mobilization of savings and forced investments in various income generating options

Eligibility criteria for Deduction

Section 80EE

One of the condition for eligibility of Deduction u/s 80EE is that loan should be sanctioned between 1 st April, 2016 and 31 st March, 2017. This eligibility period should be extended to ensure Housing for All by 2022 scheme is successful.

It is recommended to also provide deduction under this section for loans sanctioned even after 31 st March, 2017.

This will ensure Housing for All by 2022 scheme is successful.

GST

S.No

Issues

Section

Present Position

Proposed Changes

Implications

1

Advances received against supply of goods

Section 31(3)(d) of the CGST Act, 2017

Advances received against supply of goods will attract GST and the receipt vouchers to be issued will have all particulars which are applicable to invoice. Further, adjustment of such advance against subsequent supplies will also create administrative hassles for assessees. Since amounts pending at the of the month only are to be considered as advance for levy of GST, the requirement of issuing receipt voucher in a format similar to invoice at the time of receipt of advance payment is very cumbersome

The requirement of issuing receipt voucher in the format of invoice at the time of receipt of payment may be dispensed with and such receipt voucher may be prescribed for amount of advance pending at the month end.

In petroleum industry practice in existence on advance payments for product upliftment. This would result in multiple generation of GST documents resulting in wastage of manpower and scarce resources.

2

Remission of GST for storage loss, handling loss and transit loss for petroleum products covered under GST

Section 16(1) of CGST Act 2017

The weight and volume of petroleum products by its inherent nature is dependent upon the temperature and density. For the transmission process of the petroleum products, either by direct pipeline or vessel or tank wagon or tank lorry, the company incurs loss due to variation in temperature and / or density. This handling loss or storage loss or transit loss is well recognized within the petroleum industry for petroleum products and variation tolerance within 1% to 2% is well accepted.

A suitable amendment/ clarification can be issued that losses up to the permissible limits are permitted and hence the final invoice raised can be for a lesser quantity when within the prescribed limits.

The petroleum products by nature subject to volatility due to change in the temperature/density. In view of this considerable notional losses due to change in temperature/density is experienced by the oil industry. In the absence of remission it will add to the cost of the petroleum companies.

3

Cenvat Credit of Service tax paid under Forward Charge Mechanism

Rule 3(1) of New Cenvat Credit Rules, 2017

Due to complexity of operations and scale of transaction considering the major capital project which are under process, there are bound to be certain such invoices which shall be processed or received on or after 01.07.2017. As the excise duty is payable in Refinery post 01.07.2017 but in the absence of any specific provisions in GST and considering the New Cenvat Credit Rules, 2017 which does not specify the service tax paid under Finance Act, 1994 as an eligible duty in Rule 3(1), the service tax paid will be cost to company.

Appropriate amendment should be made in GST law providing relief to refineries to take input credit for the receipt of bills prior to 30/06/2017 upto 31/03/2018

In view of complexities in the petroleum industry operations, the quantum of bills prior to 30.06.2017 remaining unsettled is a reality and relief to be provided to the industry.

4

Exempting the requirement of issuing the consignment note/Lorry Receipt

Rule 54(3) of the CGST Rules, 2017

Rule 54(3) of the CGST Rules, 2017 reads as follows:

"Where the supplier of taxable service is a goods transport agency supplying services in relation to transportation of goods by road in a goods carriage, the said supplier shall issue a tax invoice or any other document in lieu thereof, by whatever name called, containing the gross weight of the consignment, name of the consignor and the consignee, registration number of goods carriage in which the goods are transported, details of goods transported, details of place of origin and destination, GSTIN of the person liable for paying tax whether as consignor, consignee or goods transport agency, and also containing other information as prescribed under rule 46."

Accordingly, where the supplier of taxable service is a goods transport agency supplying services in relation to transportation of goods by road in a goods carriage, the said supplier shall issue a tax invoice or any other document in lieu thereof, by whatever name called, containing the prescribed details in addition to information as prescribed under Rule 46 of the CGST Rules, 2017.

At present for every consignment the company prepares the invoice and the driver of the TL signs the invoice as a representative of the Transporter. In case we need to collect LR/Consignment note for every load from the Transporter, the document recording and storage and retrieval activity at the location increases. In era of paper less documentation this tremendously increase the work load along with increased storage space for record keeping/filing and other related jobs.

In case the company undertakes to generate Consignment note/LR on behalf of the transporter along with every invoice, then the number of documents generated doubles thereby increasing the stationery cost/document handling activity/storage space etc. Many transporters are not based at the location of loading especially the Dealer Transporters and transporters who are major fleet owners while many Dealer Transporters are single TL owners. Posting a representative at the loading location for the purpose of issuing LR/Consignment may not be feasible

Rule 54(3) of the CGST Rules, 2017 can be amended to include the following:

'Provided however that transporters engaged by OMCs are exempted from the provision of the tax invoice or other document mentioned above, if the document provided by the Oil Marketing Companies contains all the other information as prescribed under Rule 46.

The unique business process of the petroleum industry results in extensive movement of products cross country through tank lorry. The entire process of transport payment settlement is carried out by the companies based on the volume of transactions. Hence in view of the complications involved issuance of consignment note by the transport operator not to be insisted upon

5

E-Way Bill for taxable supplies

Section 146 of the CGST Act, 2017

Section 146 of the CGST Act, 2017 reads as follows:

"The Government may, on the recommendations of the Council, notify the Common Goods and Services Tax Electronic Portal for facilitating registration, payment of tax, furnishing of returns, computation and settlement of integrated tax, electronic way bill and for carrying out other such functions and for such other purposes as may be prescribed."

The Government by powers under the above section can notify the Common Goods and Service Tax Electronic Portal for facilitating, inter alia, electronic way bill. From the wordings of the E-Way Bill Rules, it appears that these provisions are extended to exempted and non-taxable supplies.

The following proviso can be added to Rule 138 of the CGST Rules, 2017:

‘These Rules shall not be applicable to supplies which are not under the ambit of the GST Regime or are exempted.'

Alternatively, the word ‘Supply' in the E-Way Bill Rules, could be substituted with the words ‘taxable supply' to ensure the applicability of such Rules only to taxable supplies

Unique to the petroleum industry, there is both products falling under the legacy law as well as in the new GST law. Specific exemption to be provided from E-way Bill for non-GST products

6

Zero-rating of Bunker fuel supply to Foreign run Vessel

GST rates

Presently supply of Bunker fuel sale to the foreign run vessels is exempted from excise and customs duties where payment is in foreign currency vide notification no. 12/2012 by treating them as export and therefore, CENVAT credit is also available.

Still, such foreign run vessels were opting to take bunkers at other ports en-route as bunker prices at Indian Ports were uncompetitive due to substantially higher VAT rates. Of-late, bunkering demand from foreign run vessels has started growing at Indian ports in the recent years subsequent to reduction in VAT rates by states like Kerala, Andhra Pradesh, Bengal, Maharashtra and Karnataka to the range of 0 - 1.5%.

It is recommended that Bunker fuel sale to the foreign run vessels should be made Zero rated in GST where payment is received in foreign currency. This will benefit the sale of country productions at competitive rate and also allow Input tax credit on supply of these products.

The foreign run vessels availing bunkering facilities at Indian ports would avoid upliftment resulting in competitive business to the industry. This would result in loss of earning valuable foreign exchange currency.

7

GST applicability on time charter

GST Rates

SAC 9966 covers Rental services of water vessels including passenger vessels, freight vessels and the like with or without operator. The time charter of such vessel will be covered under Heading 996602 and therefore liable for GST at the rate of 18%. The issue requires immediate resolution as the oil industry is engaged in hiring of vessels on time charter basis for both GST as well as non GST products. In case of non GST products like MS, HSD and ATF it will be huge under recovery.

Heading 9965 covers coastal and transoceanic (overseas) water transport services of goods. The voyage charter will be covered under the heading 9965 and therefore liable for GST at the rate of 5%. Heading 9973 covers leasing or rental services with or without operator. It is suggested that the time charter should be covered under the heading 9973 and therefore liable to GST at the rate of 5% so that GST rate on time charter is made in line with Voyage charter.

Results in additional cost to oil industry and differential treatment between time and voyage charter even though in both the cases it is for the purpose of transportation of imported/coastal crude/finished products.

8

GST input tax credit on storage tanks

Section 17(6) of the CGST Act, 2017

Explanation to Section 17(6) of the CGST Act, 2017 reads as follows:

"For the purposes of this Chapter and Chapter VI, the expression "plant and machinery" means apparatus. Equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-

(iii) land, building or any other civil structures;

(ii) Telecommunication towers; and

(iii) Pipelines laid outside the factory premises."

As per the GST provisions, input tax credit is not available for immovable property other than plant and machinery. The above Explanation explicitly defines the expression "plant and machinery" but is ambiguous about availability of credit in respect of large petroleum tanks (LPG Spheres) and storage tanks that are underground erected on the ground forming part of the filling unit.

Non-availability of credit for LPG spheres and storage tanks would significantly increase the cost of oil distribution and will adversely affect economics of petroleum distribution business. Absence of clarity in the GST regime would trigger litigation

A necessary clarification should be issued in relation to this Explanation to provide:

‘It is hereby clarified that for the purposes of Chapter V and Chapter VI, the expression "plant and machinery" also includes storage tanks and LPG storing spheres fixed to earth by foundation or structural support'

It is unique to the business of oil industry to build huge storage tanks for storage and distribution of petroleum products. It is a huge capital expenditure and requires status of plant and machinery.

Customs

9

Levy of Safeguard Duty on import of capital goods under Project Import Regulation

Section 8(b) of the Customs Tariff Act

Projects of national importance approved by Govt of India involving huge capital outlays are being implemented by Oil Companies. In our case we have undertaken substantial expansion of our Kochi Refinery and there are further more projects in pipeline for future implementation. We have in liaison with Ministry of Finance have obtained concessional rate of customs duty on project imports under Project Import Regulation. The import of capital goods are effected in line with the procedures laid down under the Project Import Regulations. The items imported under the Project Import Regulation falls under Chapter 98 of the Customs Tariff. Whereas these items primarily falls under different Chapter heading owing to its basic classification. Safeguard duty has been imposed vide Notification on these items falling under the primary classification and no duty is imposed on items falling under Chapter 98 of the Customs Tariff. However, field formations are of the view that although these items are imported under Chapter 98, but since the primary classification is subject to safeguard duty, such duty shall be imposable on these items. This is resulting in unnecessary litigations and substantial increase in the cost of the projects.

We request exemption to be provided under Section 8(b) of the Customs Tariff Act for materials imported under Project Import Regulation falling under Chapter 98 of the Customs Tariff.

The projects envisaged is of national importance and safeguard hence the levy of safeguard duty on project imports would result in escalation of cost which will ultimately result in cost overrun and unviability of the project.

NCCD amounting to Rs 50 per MT of crude oil purchased may be withdrawn as it is an additional burden on the company. Further there is a multitude of other taxes and duties on crude oil like Octroi, etc.

A quote from the Finance Bill 2003 , "Unfortunately, the Nation has been facing a severe drought this year. The funds raised earlier under the National Calamity Contingent Duty are not sufficient. It is, therefore, proposed to impose a 1 per cent National Calamity Contingent Duty on polyester filament yarn, motor cars, multi utility vehicles and two-wheelers. Similarly, crude, domestic or imported, will also be subjected to a duty of Rs.50 per metric tonne for this purpose. However, these new levies will be limited to one year only. "