Tax Book 2023

Oil, Natural Gas and Other Mineral Deposits Chapter- 26

(ii) During year 2 expenditures on exploration were incurred to the tune of Rs. 400,000. The commercial
production this year again could not commence but the company decided to abandon one of the dry
holes. The expenditure attributable to dry hole was Rs. 200,000.

(iii) The company commenced commercial production during year 3. The expenditure up to
commencement of commercial production amounted to Rs. 1,000,000. This includes expenditure of
Rs. 600,000 incurred upto year 2 and also includes Rs. 200,000 represented by physical asset ‘in
use’ at the time of commencement of commercial production.

You are provided with following further information

(i) Expenditure amount to Rs. 400,000 incurred after the commercial production also includes
Rs.100,000 which represent physical assets in use.

(ii) The gross revenue from sale of crude oil was Rs.1,200,000.

(iii) Royalty @ 12.5% was payable.

Required: On the basis of the foregoing information please compute taxable income, tax payable and / or
royalty refundable or capable of being c/f.

Solution

Onshore area Offshore area

Rs. Rs. Rs. Rs.

Sale of crude oil 1,200,000 1,200,000

Royalty @ 12.5% (not admissible for offshore area) (150,000) -

Expenditure after CCP 400,000 400,000

Represents physical assets in use (100,000) (300,000) (100,000)

(300,000)

Expenditure prior to CCP 1,000,000 1,000,000

Lost expenditure (200,000) (200,000)

Represents physical assets in use (200,000) (200,000)

600,000 600,000

10% of above (25% for offshore area) (60,000) (150,000)

Tax depreciation on physical assets

• Prior to CCP Rs. 200,000


• 15% normal depreciation (20% for offshore area) 30,000 40,0 00


• After CCP Rs. 100,000


• 2 5% initial allowance 25 ,000 25 ,000


• 15% normal depreciation (20% for offshore area) 11 , 250 ( 66 , 250 ) 15 ,000 ( 8 0,000)

Lost expenditure of year 2 (200,000) (200,000)

Gain prior to depletion allowance 423 , 750 47 0,000

Depletion allowance - 15% of Rs. 1.2 million or 50% of

gain prior to depletion allowance whichever is lower (180,000) (180,000)

Taxable income 243 , 750 29 0,000

Income tax @ 40% (for onshore area) 97 , 500

Income tax @ 29 % (for offshore area) 84,100

Aggregate limit on income tax and other payment to

the FG:

Income tax payable 84,100

Royalty payable 150,000

234 , 100