The Centre on Tuesday revised the windfall tax on oil companies for the second time since its imposition a month back. The frequent revision lends uncertainty to these companies, particularly domestic producers. However, experts have backed the move given the very nature of windfall tax and the volatility of global crude prices.
They said, however, that the government should bring in clarity as to how the receipts will be utilised and follow the UK’s example of providing discounted bills to low-income groups.
The government had imposed windfall tax on domestic production of crude at Rs 23,250 a tonne and on export of petrol, diesel and aviation turbine fuel at the rate of Rs 6, Rs 13 and Rs 10 a litre, respectively, on July 1. This was expected to yield the government Rs 94,800 crore in the remaining months of the year.
However, the government later slashed the tax on domestic production of crude to Rs 17,000 a tonne on June 20, withdrew it on export of petrol, and cut it on diesel and ATF to Rs 11 and Rs 4 a litre, respectively.
On Tuesday, the Central Board of Indirect Taxes and Customs announced raising the tax rate on domestic production of crude to Rs 17,750 a tonne with effect from Wednesday. Also, the duty on ATF exports was withdrawn and the one on diesel exports was reduced to Rs 5 a litre.
While this will hit oil producers such as ONGC and Vedanta, the move will help exporters like RIL.
At the time of imposing the windfall tax, the government had stated that the objective behind the move was to shore up domestic supplies as refiners were exporting rather than meeting local requirements. It was also aimed at checking windfall profits of domestic oil producers who sell their output to domestic refiners at international parity prices.
Krithika Jaganathan, joint partner at Lakshmikumaran & Sridharan Attorneys, said while the windfall tax does not impact the public, some clarity is required on how this revenue will be utilised. “For example, the UK announced discounted energy bills to low-income households using the receipts from windfall taxes. This is a great opportunity for the government to balance energy efficiency and inflation as well,” Jaganathan said.
Bank of Baroda chief economist Madan Sabnavis said ideally windfall tax should have a fixed rate and tenure, but since it is being imposed on oil companies, where the underlying is volatile, it does enhance uncertainty.
“Hence, companies should make internal calculations based on their assessment of a proper price and profit to hedge for this uncertainty. The government on its part has to fine tune these rates as there is little it can do about such externalities,” he said.
Sabnavis said the very nature of a windfall tax is that it would not be stable as it is based on the premise that a company makes windfall gains not due to its operations but due to an external force.
Prashant Vasisht, vice president and co-head of corporate ratings at ICRA, said though tinkering with these rates frequently creates uncertainty, considering the high level of prices (crude prices consistently above $100 a barrel, crack spreads of gasoil above $30 a barrel) a number of countries have imposed windfall taxes and accordingly as a measure per se, India is not the only country to implement this.”
He said the tinkering of the export duties is being done on the basis of the movement of the crack spread on these products, which have been elevated but volatile due to the geopolitical situation, lockdowns, inventory levels, and demand fluctuations.
Additionally, windfall tax on crude production has also been increased, though marginally, considering the international crude oil price trends, Vasisht pointed out.
Raghavan Ramabadran, executive partner at Lakshmikumaran & Sridharan Attorneys, said the revision of rates and scrapping of taxes on export of petrol was well aligned, considering global oil prices.
The rate of the Indian crude basket stood at $100.41 a barrel as on August 2, against $105.49 on an average in July and $116.01 in July.
Ahead of a meeting of OPEC members, Brent crude futures fell 94 cents at $99.60 a barrel in early trade on Wednesday.