The government’s decision to withdraw income tax holiday for new refinery projects is going to hit the oil sector badly. In its first reaction to the situation, Oil and Natural Gas Corp (ONGC) has decided to review its new planned refinery projects at Kakinada and Mangalore.

The new refineries will no longer enjoy the income tax holiday for seven years from the day it starts operations under Section 80-IB of the Income-Tax Act. The sunset clause would not have any affect on the refinery project to start production before April 1st, 2009.

Speaking to media persons, ONGC, chairman R S Sharma said, “This proposal of withdrawing the income tax holiday for refineries commissioning after April 1 2009, would impact new refinery projects in the country. Considering this proposal we would review our projects at Kakinada and Manglore.”

According to the information available, ONGC had engaged Engineers India Ltd (EIL) for techno-economic feasibility study of the Kakinada project with initial plan of a 7.5 million tonne capacity export-oriented refinery.

SBI Caps’s financial appraisal found the project unviable economically. EIL was again engaged for carrying out a detailed feasibility report for 15- million ton capacity.

It estimated the cost of setting up a 15- million ton refinery at Rs 25,000 crore. Therefore the tax holiday was one of the biggest incentives for ONGC to go ahead with the project.

While almost every oil refining company in India would be affected by the government’s decision, Reliance Petroleum’s 29 million tons export-oriented refinery at Jamnagar would be out of the purview of this sunset clause.

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