Oil, gas exploration gets costlier after govt clarifies ship rental tax

The government’s clarification in the Budget 2008 that ships hired to support drilling activities would indeed attract a 12.5% service tax, will make oil and gas exploration more expensive, given the unwillingness of explorers to pay the tax, forcing shipowners to take a hit to their financials by doing so themselves.
Exploration firms were brought under the purview of service tax in Budget 2007, but they have thus far refused to pay up arguing that the levy did not cover hiring of ships, as these were not involved in mining and drilling operations.
“To promote oil exploration activities along the county’s coast, the government introduced a special tax regime for this industry in the new exploration licensing policy, wherein it (the sector) is exempted from all duties and levies. Why should the government impose a service tax on us now?” asked an official with Oil and Natural Gas Corp. Ltd (ONGC), India’s biggest oil explorer. The official did not wish to be identified. ONGC has hired at least 100 offshore support and supply ships, paying anywhere between $2,000 (Rs81,000) and $12,000 a day to shipowners. Hiring of oil drilling rigs is costlier with daily rentals in excess of $200,000.
Both oil firms and local shipowners lobbied vigorously in the run-up to the Budget to exempt ship rentals to the offshore oil industry from service tax.
However, Budget 2008 clarified that renting ships such as drilling rigs, offshore support and supply vessels, anchor handling tugs and other supply boats would come under the scope of service tax.
Exploration companies are still resisting the tax. State-owned ONGC said it could not absorb the extra costs unless the government provides for it in the firm’s annual budget. “Oil exploration firms told us that service tax is not payable by them when we asked them to reimburse the levy on ship rentals for payment to the government,” said an official with Garware Offshore Services Ltd.
Shipowners could be in trouble as a result. The indirect nature of the tax means shipowners have to collect it from explorers and pay it to the government.
Recently, the Indian National Shipowners Association (Insa), the umbrella body representing local shipowners, received a communication from the government’s service tax department asking shipowners to pay the tax or risk action.
“We are in a jam. On one hand, we cannot violate government tax laws. On the other, we cannot give up on our clients,” said an executive with TAG Sealogistics Ltd who did not wish to be identified.
Shipowners such as Shipping Corp. of India Ltd, Great Eastern Shipping Co. Ltd, Varun Shipping Co. Ltd, Garware Offshore, TAG, Great Offshore and Dolphin Offshore Enterprises (India) Ltd will have to take a substantial hit if they are to pay the service tax from their own pockets. “It is a sizeable amount and will be a big problem for shipowners,” an Insa official who did not wish to be identified said.
The oil explorers’ stance contradicts a commitment by at least some of them to reimburse the service tax if it is made mandatory. “In fact, some shipowners had incorporated a clause in their contracts with ONGC that the company would reimburse service tax if it became payable,” said an executive with Great Offshore, India’s biggest offshore service provider.
“So, we are pretty much covered both contractually as well as due to the indirect nature of the tax, which is paid to the government only after it is collected from the end users,” added this executive who did not wish to be identified.