2 nd India-Africa Hydrocarbons Conference Regulatory considerations

1. 2nd India-Africa HydrocarbonsConference Regulatory considerations

2. Contents • Investments into India - Inbound Investment - Regulatory framework - Tax considerations • Investments from India - Outbound Investment - Regulatory framework - Investment structure - Tax considerations

3. Inbound Investment – Regulatory framework • Foreign Direct Investment (FDI) Policy

4. Inbound Investment – Regulatory framework (contd..) • Automatic Route not available if existing Joint Venture (JV) or technology transfer/ trademark agreement in 'same' field Exceptions: • Investments by Venture Capital Funds registered with the Security and Exchange Board of India (SEBI), • investment by either of the parties is less than 3%, and • existing venture/collaboration is defunct or sick. • ‘Conflict of interest‘ clause may be provided for in JV agreements to safeguard the interests if the foreign partner decides to set up another JV or a Wholly Owned Subsidiary (WOS) in the same field.

5. Inbound Investment - Tax considerations Direct Tax Regime • Special tax regime under Production Sharing Contracts (PSCs) signed with the Government of India -Each member to be assessed in respect of its own share of income in the same status in which it has entered into the agreement with the Central Government • Special provisions for determination of taxable income for business of extraction, prospecting of mineral oil, • 7 (consecutive) years tax holiday for "undertakings" engaged in production of “mineral oils” starting from the year in which it commences commercial production, • Site Restoration deduction allowable, • Foreign service providers given an option to be taxed on deemed income basis at the rate of 10 per cent of their total receipts

6. Inbound Investment - Tax considerations (contd..) Other direct tax considerations: • Treatment of E&D costs incurred • Taxability of royalties / other expenses paid in terms of the PSC • Ringfencing in the case of multiple blocks • For services / facilities – taxability to be governed by nature and type of set up in India, • Withholding tax issues in the case of specified payments, • Profit repatriations issues – Transfer pricing regulations, • Availability of tax credit in home country

7. Inbound Investment - Tax considerations (contd..) Indirect Tax Regime • Customs • Import of “Petroleum and Gas well drilling machinery” generally attracts a Basic Customs Duty (BCD) of 7.5%; • 10% BCD under the project import scheme on import of inputs required for “exploration for oil or other minerals”; • Exemption from BCD and Additional Duty of Customs (CVD) available on import of goods specified in List 12* required for petroleum operations undertaken under specified contracts under the New Explorations Licensing Policy (NELP). • Excise Duty • Exemption from Excise Duty is not applicable on goods supplied to oil and gas and petroleum projects, crude petroleum refineries; • No Excise Duty is leviable on crude oil.

8. Inbound Investment - Tax considerations (contd..) • Applicability of Service tax on the following • Survey and Exploration of Mineral, Oil and Gas Services; • Site Formation and Clearance, Excavation and Earthmoving and Demolition Services; • Mining of Mineral, Oil or Gas Service; • Erection, Commissioning or Installation Service; • Supply of Tangible Goods for Use Service; • Consulting Engineer’s Services; • Works Contract Service. • Indirect Tax Issues • Ambiguity on applicability of Value Added Tax (VAT) /Central Sales Tax (CST) on goods supplied to offshore oil and gas projects situated in economic islands beyond 12 nautical miles.

9. Inbound Investment - Tax considerations (contd..) • Proposed Goods and Service Tax (GST) regime : • The Indian government proposes to introduce the GST scheme with effect from April 1, 2010. • GST is to be levied on a dual basis – Central GST (Central levy) and State GST (State levy). • GST would subsume most of the indirect taxes such as Excise Duty, Service Tax, CST, VAT and Entry Tax. • It has been proposed to keep the basket of petroleum products such as crude, motor spirit and HSD to keep outside the purview of GST. • A final view as to whether Natural Gas would be covered under GST is yet to formulated and is subject to further deliberations.

10. Outbound Investment – Regulatory framework

11. Outbound Investments – Regulatory framework (contd..)

12. Outbound Investment – Investment structure • Forms of investment • Acquisition / Merger • Marketing presence • Investment vehicle • Resident holding company • International holding company • Company, Branch or representative office • Direct investment • Mode of acquisition • Share purchase • Asset purchase

13. Outbound Investment – Investment structure (contd..) • Holding structure – In India or outside India • Operational structuring - Integrating supply chains • Integration of newly acquired subsidiaries with the existing operations • Location of IPR • Repatriation Mode

14. Outbound Investment - Tax considerations • Manage ETR • Tax efficiency of funding • Access to debt and equity capital from both domestic and international capital market • Fiscal regime of investee country • Type of taxes payable in investee country • Whether any special tax regime for investing entity, • Whether any special provision for allowability of expenses, • Whether any tax holiday on production • Whether treaty provides for special treatment of capital gains and dividends

15. Outbound Investment - Tax considerations (contd..) • India currently has Double Taxation Avoidance Agreements (DTAA) with more than 70 countries out of which it has entered into tax treaties with 12 countries in African Continent. Notes: a - The 5% rate applies where beneficial ownership is in excess of 25% b - Since dividends are free of Indian tax in the hands of shareholder, India would not impose the withholding tax as prescribed under the treaty

16. Outbound Investment - Tax considerations (contd..) • Investment in overseas blocks require analysis of various factors • Taxability of exploration/development costs incurred • Taxability of expenses not considered as part of ‘cost oil’ (signature bonus, royalty), etc • Issues regarding investment • Tax burden on investments/ technology • Tax efficiency of funding • Tax depreciation for goodwill and other intellectual property acquired • Access to debt and equity capital from both domestic and international capital market • Double taxation