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Home / Industry / Energy /  Making sense of the windfall tax on crude oil

On 1 July, the government imposed a special additional excise duty of 23,250 per tonne on the sale of locally produced crude oil, sending stocks of oil producers tumbling. Here is what prompted the windfall tax, and its likely implications.

What necessitated the windfall tax?

Crude oil prices soared after the Russia-Ukraine war broke out, earning large profits for oil producers. Domestic producers sell crude to refiners at prices benchmarked on international prices. The bellwether Brent crude prices have been at multi-year high levels since February, and the August contract is currently above $113 per barrel. In Q4FY22, state-run ONGC Ltd reported a 10% rise in net profit at 12,061 crore. Another state-run producer, Oil India Ltd, also reported its highest-ever quarterly net profit in the March quarter at 1,630.01 crore, nearly double the profit reported in the year-ago period.

Will it help the exchequer?

Yes; especially since the government stands to lose about 1 trillion due to the recent excise duty cuts on petrol and diesel. According to Moody’s Investors Service, the windfall tax, along with the decision to impose additional excise duty on the export of petrol, diesel and jet fuel, may generate nearly $12 billion additional revenue in FY23. The additional revenue will help offset the negative impact of the fuel duty cuts in May. Higher revenue is likely to help in gradual fiscal consolidation, as the central government aims to keep the FY23 fiscal deficit at the budgeted 6.4%.

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Will the windfall tax impact consumers?

According to the Centre, the additional tax will not adversely affect prices of crude, petrol or diesel. Retail fuel prices are determined on the basis of the average of global 30-day trailing prices. This tax will be absorbed by upstream firms and will not be passed on to refiners as they will continue to sell oil based on international prices, thereby not impacting consumers’ budget.

What  will  be  the  impact on  oil producers?

They will take a hit. According to ratings agency ICRA, the tax is credit-negative for oil producers, and it would reduce the realization on crude by about $40 per barrel, impacting profits and cash accruals. The tax may adversely affect the EBITDA of the Indian upstream industry by about 518 billion for FY23. However, ICRA expects that the capex plans of the incumbent upstream companies would remain largely intact owing to the remunerative realizations of $60-80 a barrel for crude after the imposition of the cess.

When will government review its decision?

The Centre will review the windfall tax on crude oil every fortnight on the basis on foreign exchange rates and international oil prices. Therefore, it should be expected that a significant decline in oil prices may lead to a revocation of the additional tax. However, a revision in the tax seems unlikely in the near term, with oil prices remaining elevated. Experts say crude prices are likely to remain in the range of $100-120 a barrel in FY23 owing to fewer lockdowns, persistent geopolitical tensions and limited spare capacity.

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