Mon, Nov 08, 2010 | Updated 03.

07PM IST
By Akhil Sambhar, Senior Manager & Raju Kumar, Manager, Tax & regulatory services, Ernst & Young Pvt Ltd
The Indian economy is currently in an energy-intensive phase of development. While, the domestic oil consumption grew at 6.4% from 2004-2008, leading to an
increase in India's import dependence to approximately 78% of total consumption in 2008, whereas, the growth in gas consumption has been comparatively slower.
At present, nearly 75% of natural gas in India is utilized by the power and fertilizer sectors. However, recent gas discoveries in the east coast and expansion of gas
infrastructure have encouraged a shift towards natural gas.
The predominance of natural gas, as a fuel for city energy purposes, is primarily due to three reasons. Firstly, natural gas as a transport fuel is more economical
than traditional fuels. For example, current cost of CNG in Delhi is Rs 18.90 per kg in Delhi, while petrol and diesel cost Rs 40.62 per litre and Rs 30.86 per litre,
respectively.
Secondly, natural gas has lower levels of emissions which make it a cleaner fuel as compared to traditional fuels. Thirdly, CNG has a considerably higher octane
content which makes it more energy-efficient. Comprehending these benefits, the Supreme Court directed commercial vehicles in several cities to switch from
traditional liquid fuel to natural gas
Keeping the above in mind, there is a greater need for better gas infrastructure including city gas distribution (CGD) networks.
In an endeavor to develop and fuel growth for the natural gas market, the Government has set-up the Petroleum and Natural Gas Regulatory Board (PNGRB) which,
in turn has notified regulations for CGD networks for supplying gas to compressed natural gas stations and piped natural gas (PNG) to household consumers, other
industrial and commercial consumers.
These regulations, among other things, deal with the authorization of CGD networks, exclusivity and tariff determination. Currently CGD networks are operative in
multiple cities including Delhi, Mumbai, Indore, Pune, Vijayawada, Vadodara, Surat, Ankleshwar, Ahmedabad and Kanpur. PNGRB has commenced expansion of
CGD networks to nearly 200 cities. This would entail investments of nearly USD 2 bn according to the eleventh plan. Further, the PNGRB has invited bids for a few
cities by March 2009.
In view of the significant investment and lengthy gestation period associated with CGD networks, it is imperative for the government to provide tax incentives to
companies interested in setting up these networks.
Currently, the domestic tax law provides a 10 year tax holiday for laying and operating 'cross country' natural gas distribution network, including pipelines and
storage facilities. To avail this tax holiday one of the pre-requisites is that atleast one third of the total pipeline capacity should be available for use on a common
carrier basis by persons other than the assessee or its affiliate(s).
The ambiguity of the tax incentive is its applicability for CGD as the term 'cross country' is neither explained nor articulated in the law. Separately, the prerequisites
in the tax holiday provisions are not in line with CGD policy. The CGD regulations provides a 5 year exclusivity from the purview of common carrier and post the
exclusivity period, the company has to allow access to its network on a common carrier basis, although there is no mention on the capacity that has to be made
available.
Tax holidays were introduced with an aim to promote the setting up of gas infrastructure and simultaneously reduce the existing subsidy on LPG. Since gas
distributed through the CGD networks is a substitute for LPG, the applicability of tax incentives for CGD network is in line with the legislative intent. Tax incentives
will also reduce the operating costs which will help in reducing the price charged to consumers and encourage households to migrate from LPG to PNG.
(The views expressed herein are the personal views of the author)
20 MAR, 2009, 04.02PM IST,ECONOMICTIMES.COM
Emergence of city gas distribution networks in India
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