IOC to miss tax holiday for Paradip refinery
New Delhi   26-Dec-2011

State-run refiner IndianOil (IOC) will miss the bus to enjoy tax holiday for its upcoming refinery in Paradip, Orissa. The refinery, earlier scheduled for commissioning in March 2012, is delayed by another year. This means profitability of the refinery and return on capital investments will see a fall.

The company also claimed that there is no cost overrun due to this delay and the project would be completed within the budget of Rs 29,777 crore.

At present, a refinery set up by March 31, 2012 is entitled to exemption from payment of income tax on revenues earned in first seven years of operations. This benefit is given under Section 80IB (9) of the Income-Tax Act. The petroleum ministry has sought extension of this tax holiday by another two years till 2014. However, finance ministry is not willing to budge and denied any extension of tax holiday.

“We have asked the government for an extension of tax holiday till 2014. We do not know if they would agree to it,” IOC director (refineries) RK Ghosh told Financial Chronicle.

“If any project misses tax holiday and that too for seven years, it would impact the profitability of the refiner. Return on investment would actually fall, as part of revenues would go for paying tax beginning the commissioning of the refinery,” explained Kalpana Jain, senior director at Deloitte Touche Tohmatsu India.

Dip in profitability will add extra burden to IOC’s balance sheet that is already bleeding because of high under recoveries.

When asked if the estimated budget for Paradeep refinery would exceed because of delay in commissioning, Ghosh said, “No, there will be no cost over-run. This is because all equipment orders have been placed on time. The extra time is because, initially, there were delays in getting approvals.”

IOC has already put few contracts into lump sum turnkey (LSTK) model after reviews brought to limelight that the project is behind schedule. In LSTK mechanism, the contractor is responsible for engineering designs, procurement of equipment and implementing the project. On the contrary, under traditional method, the work is completed in three different steps and takes a longer time. First, a consultant will come up with engineering design and requirements. In the second step, equipments will be procured and at last the project will be implemented. All these three steps will have to be cleared by company’s board individually and tenders are offered separately at all stages.