When the Russia-Ukraine tensions started, little did anyone think about the fortune it would bring about for oil companies in India. As the tensions led to a full-scale war, countries worldwide imposed sanctions on Russia, including restrictions on oil imports from the country. Two major oil firms in India gained from this fall in supply in the global market. ONGC, the largest crude oil producer in India, saw prices for its exports skyrocket, and refinery firms got cheap crude from Russia — both making windfall gains, in the process.
On July 1, the government imposed a windfall gain tax (WGT) on both domestic producers and exporting refineries. On domestic producers, a special additional excise duty of ₹23,250 was imposed on each tonne of crude oil sold. A similar excise duty of ₹6 per litre on petrol and aviation fuel and ₹13 per litre on diesel was imposed on the export of refined products. The government’s move was to tap into the super-normal profits of oil companies, especially given the loss of revenue from the recent tax cuts on petrol and diesel.
But the recent developments in the market do not favour the windfall gain tax. Fuel prices have steadily declined after the imposition of taxes by about $15 per barrel. Therefore, the windfall gains of firms do not exist to the earlier extent, and the oil companies were looking forward to a favourable review of the tax by the government.
Hence, the government decided to lower the WGT on diesel and aviation fuel by ₹2 a litre and scrapped the petrol export taxes of ₹6/litre. Further, it also slashed the tax on domestically produced crude to ₹17,000 a tonne by about 27 per cent. Though this may not relieve consumers’ pain, it is a much-needed breather for the oil firms.
The imposition of the WGT saw an immediate drop in the values of shares of oil companies like Reliance, ONGC, and Oil India. The fall reflects the expectation that oil-producing firms like ONGC and Oil India would be more affected.
Reliance exports 58 per cent of its refined products and the blended impact of the tax on GRM (gross refining margin) was expected to be moderate, according to a report by Jefferies India.
A government order to sell at least 50 per cent of the production in the domestic market and the higher export taxation of diesel would negatively impact public sector MRPL, which had recently cut its debt by ₹7,000 crore thanks to the spike in the price of petroleum products. MRPL, a major producer of diesel and ATF, exports 50 per cent of its diesel and 75 per cent of ATF.
Analysts also point out that the higher earnings of oil companies due to higher crude price and GRM will normalise with the new tax. Stock market experts opine that the oil companies’ stock prices that hit a low are slowly stabilising to a new reality. Global credit rating agency Moody’s points out that the tax will not materially weaken the oil companies as they will still enjoy a reasonable margin.
Italy was one of the first nations to impose a WGT on oil companies in early May to help consumers and firms cope with the high energy prices. A 25 per cent tax on oil firms is expected to bring in almost $11 billion to the Italian government. The UK announced a similar windfall tax of 25 per cent on its oil companies at the end of May.
In India, the new tax would help compensate for the government revenue forgone via excise duty cuts on petrol and diesel. The higher revenue will also aid the move to get closer to its fiscal deficit target of 6.4 per cent.
The special tax, along with the notification on minimum domestic supply, will boost local availability at a time when many States, dependent on private oil company outlets, are facing shortages.
As falling global fuel prices have eroded profit margins at both oil producers and refiners, the government’s move to lower WGT on fuel exports and eliminate gasoline export levies is a step in the right direction.
The government must periodically review the tax and act swiftly to reflect the global fuel price realities. It should also clearly announce when the WGT will be withdrawn, to eliminate the uncertainty.
Dash is a faculty at the Gulati Institute of Finance and Taxation (GIFT), Thiruvananthapuram, and Sidharth is an MA Economics student at University of Kerala