Mark to market
For the salaried class, the sprint has begun. at the end of the month, the tax collector's doors close for those who don't wish to default on their dues to the state. The effort is one of minimising the bill by investing in various tax saving instruments. And, the task is not easy. It is equally unpleasant for Finance Minister P. Chidambaram who would ideally like to reduce the tax rates to levels prevelant in the neighbouring ASEAN countries. He, however, finds it difficult to reduce taxes or enhance the exemption limits and forego revenues. This, since it is critical for funding social and health programmes, especially, when personal taxes accounts for 20 per cent of total collections (Rs 4,67,848 crore). Further, he is betting on collecting 20 per cent more than what he mopped up last year.
But, does he have a choice? Yes, if he is willing to look at the petroleum sector with a different lens, perhaps a periscope. The current one enables him to collect a fourth of the total taxes collected in the country from the sector. The periscope will show him the extent of revenues foregone by not keeping up with the market in the exploration business, several kilometers below the sea level-i.e., the rent collected from exploration contractors who have struck oil and gas. Called profit petroleum (PP), the government gets a share of oil and gas based on a bidding process. Last year, the government netted around Rs 4,000 crore on this count.
The problem with the contract regime is that it has not undergone any significant change over the last seven years although two significant market developments have occurred in the interregnum. First, oil prices have more than trebled. Secondly, the prospects of finding oil and gas have vaulted in certain regions of the country. This can be attributed to the success encountered by companies like Reliance Industries and Cairn.
A power ministry official recently tried to reduce regulation in the power sector. He mooted a proposal to end the role of the power ministry in the allocation of coal mines by the coal ministry. The first line of resistance came from none other than the industry itself. It's fervent appeal: the power ministry should continue its recommendatory role. Not surprisingly, the proposal did not go through.
Cash or kind?
For the 'proper' bureaucrat, honesty scores over efficiency. That it must be coded in their genes is borne out by a recent incident in the petroleum business. As part of his lobbying efforts against his elder brother's gas price proposal, Anil Ambani has been sending his officials to the petroleum ministry. The burning issue: should the government take its share of gas in kind or must it relent to RIL's proposal to take it in cash? In one of the meetings with an official, Ambani Jr's liaison man jumped to the issue without a primer and asked "Cash or kind, Sir"? The officer was aghast at his question but recovered quickly to realise the true import of the question.
Yet, the fiscal terms for the contractor are extremely liberal, allowing for recovery of costs in case it encounters success anywhere in the country. Surely, such terms are not required in the Krishna Godavari basin, off the coast of Andhra Pradesh, which is virtually floating on a bed of natural gas. Going a step further, the government should consider extracting a "signature" bonus from explorers interested in this basin. This will ensure that it does not have to wait a minimum five years, the time taken between exploration and commercial production, to get its first rental cheque. Furthermore, in such hydrocarbon-rich, production sharing deals must be replaced with concession agreements, in line with global practice. In the latter regime, the State takes a fixed share of oil or gas regardless of the contractor's total output from the field.
In other words, the exploration sector must provide for a differential regime to capture changing market conditions-a liberal regime can continue only in those basins (geographic metric for oil and gas formations) where the prospects of finding oil and gas have not been established. Surely, if the Finance Minister pays attention to this business, the tax payer could breathe easy next year. The reason: the next round of auctions are slated towards the end of this year.