Home / Industry / Energy /  Windfall tax cut and how it benefits Indian oil & gas companies

It is 40-degree Celsius. The sun is right above your head. You are out in the market, wishing for some relief from the heat.

Suddenly, your wish is granted. The atmosphere changes, and it starts to rain. Soft drops of rain that make you feel good.

A true relief, right? 

Well oil refinery companies are experiencing the similar feeling today.

Recently, the oil and gas sector was under pressure because of the windfall tax. 

The government of India earlier this month announced a windfall tax that was expected to negatively impact oil and gas companies in the country.

However, the share price of oil refinery companies is finally on the rise today.

ONGC, Reliance Industries, GAIL, among others gained big time as the government cut the windfall tax.

But why was the windfall tax levied, and what suddenly changed today?

Read on to find out…

Why was the oil and gas sector under pressure lately?

Almost all leading companies from the energy sector were under pressure.

Reliance Industries share price was falling.

GAIL share price was no exception, and neither was ONGC.

International crude oil prices were rising like there’s no tomorrow. Domestic oil refineries' revenues were booming because they sold oil at international parity prices.

Thus, the oil industry was earning windfall gains because of the global rise in crude oil prices.

While oil refineries were rejoicing with these high revenues, the government was afraid. This is because rising oil prices are against the public interest.

The government had two concerns, domestic rise in oil prices and short supply for domestic needs.

Hence to curb the windfall gains of oil refineries, the government introduced a windfall tax on oil refineries.

As the name suggests, a windfall tax is a tax levied by the government only in case the industry is earning unjust windfall gains. The tax is only levied in the public interest.

Hence to control the rising domestic oil price and to meet the domestic need for petrol, on 1 July 2022, the government introduced a windfall tax.

The export duty of 6 per litre was levied on auto fuel including petrol and aviation turbine fuel (ATF). A special excise duty of 13 per litre was also levied to the export of diesel. This move would affect both exporters and refineries including GAIL India.

Additionally, a cess of 23,250 per tonne was to be levied on domestically produced crude oil. This would have some adverse impact on the earnings of government-owned oil and gas producers as well as private players.

Hence owing to this, shares of oil and gas companies tumbled. Reliance had fallen 8% when the tax was announced, and ONGC fell 15% after the announcement.

So, what changed today?

Crude oil prices have finally cooled down.

After rising rapidly, international crude oil prices are finally falling. Owing to this fall in price, the government was planning on bringing down windfall taxes.

Finally, the government announced a reduction in windfall taxes today. The centre reduced the windfall tax on domestically produced crude to 17,000 a tonne and also cut the levy on exports on diesel by 2 and aviation-fuel exports would be cut by 2 a litre.

It also exempted special additional excise duty levied on exports when done from the special economic zone.

Owing to this, shares of Reliance surged 4% today while ONGC rallied 7%. Chennai Petroleum rallied more than 10% while MRPL also zoomed 5%.

Why the reduction was much needed…

The reduction in windfall taxes was much needed. The centre had already announced that it will review the windfall tax every 15 days.

With geopolitical tensions around the world finally relaxing, it is expected that global oil prices will finally come back down to normal in the near future.

Increasing awareness and demand for electric vehicles (EVs) and ethanol was already a threat to crude oil prices.

Hence investors must carefully look at the global oil scenario before investing in the oil and gas industry.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. 

This article is syndicated from Equitymaster.com


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