Companies exploring oil and gas in the country are likely to be exempted from paying service tax of 12 per cent in the coming Budget.

The tax, which was introduced for oil exploration companies in last year's Budget, has been resisted by the industry since its introduction.

The waiver of tax is aimed at encouraging global companies to bid for exploration licences under the upcoming seventh round of the New Exploration and Licensing Policy (Nelp-VII).

"Since exploration for oil and gas is a high-risk business, and not every project results in a discovery, the finance ministry will take up the issue of waiving the service tax component for oil exploration companies in the coming Budget," said a senior government official. The Petroleum Ministry has also included this in its Budget recommendations.

Total service tax collections in the current financial year are expected to be Rs 50,000 crore (Rs 500 billion), of which around Rs 600 crore (Rs 6 billion) have been contributed by the exploration and production companies.

"If the tax is withdrawn, the impact on tax collections will not be huge," said a senior petroleum ministry official.

The country imports almost 75 per cent of its crude oil requirement. The oil import bill rose 29.5 per cent to $48.02 billion in the first nine months of the current financial year, compared with the same period last year.

"We need to encourage more global companies, which have the right technology to find oil and gas in the country, in order to meet our growing energy needs," the oil ministry official said.

Service tax is usually paid by the firms providing services at the drilling locations of the oil companies. The tax is, however, a pass-through, which increases the overall cost of services for the oil firms.

"Cost of services has anyway more than doubled in the last couple of years. The additional service tax brings in more uncertainty in the sector," said a senior official with an oil exploration company.

The shipping costs of oil exploration companies can also increase if the service tax applies to operations of offshore supply vessels transporting materials to and from offshore drilling sites to the shore.

Oil and Natural Gas Corporation, the country's largest oil and gas exploration company, currently operates around 125 offshore vessels in the west coast alone. It pays charges between $1,700 and $19,000 per day depending on the type of vessels.

The industry has been of the view that the tax net does not extend to supply vessels as they are not included in mining and drilling operations, for which the tax was introduced.

The government, however, says that drilling operations cannot be seen in isolation and all allied services also come under the tax net.