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Windfall tax on  crude cut, export  levy  on petrol  goes

The government exempted exports of petrol, diesel and jet fuel from special economic zones (SEZs) from the export tax.  (Photo: Bloomberg)Premium
The government exempted exports of petrol, diesel and jet fuel from special economic zones (SEZs) from the export tax.  (Photo: Bloomberg)

  • Reductions part of first review promised when taxes were introduced this month
  • The reduction in windfall cess is positive for oil explorers, but gains will likely be offset by lower net realizations

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NEW DELHI : The government slashed the windfall tax on crude oil by 27%, withdrew an export tax on petrol and cut the same on diesel and jet fuel, offering relief to state-run oil producers and refiners such as Reliance Industries Ltd and Rosneft-backed Nayara Energy.

The cuts were part of the first review promised when the taxes linked to global energy prices were introduced earlier this month.

Winds of change
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Winds of change

The tax cuts were widely anticipated since crude oil prices plunged after their imposition. Oil prices fell below $100 per barrel last week from around $115 when the taxes were imposed. The September contract of Brent crude was trading at $105.67 a barrel on Wednesday.

The Central Board of Excise and Customs (CBIC) cut the windfall tax on crude oil to 17,000 a tonne and reduced the export tax on jet fuel to 4 a litre from 6 on Wednesday. In addition, the government abolished the export tax of 6 a litre on petrol and cut the tax on diesel by 2 to 11 a litre.

Besides, the government exempted exports of petrol, diesel and jet fuel from special economic zones (SEZs) from the export tax, effective Thursday, in a big win for Reliance Industries.

The tax on locally produced crude oil and export taxes was part of steps taken to improve local supplies of key commodities amid shortages and surging prices.

The Centre had also banned wheat exports and imposed curbs on sugar exports. Besides, the windfall tax offered the government a chance to mop up some of the super-profits of crude producers such as Oil and Natural Gas Corp. and Oil India Ltd.

The cut in export duties on refined products and exemption from export duties for SEZ refineries would lower the impact on Reliance Industries’ gross refining margin to a modest $2.3 per barrel from the previous $11.8, Nomura said in a note to clients on Wednesday.

Queries sent to ONGC, Oil India, Reliance Industries and Nayara Energy remained unanswered till press time.

The exemption to exports from SEZs, although it may affect the local availability of key fuels, shows the government is under pressure to support exports and sustain dollar inflows as India reported a record trade deficit in June. The widening trade gap and fund outflows from local stocks and bonds have put the Indian currency under pressure.

The rupee weakened to 80 against the dollar on Tuesday and traded near that level on Wednesday.

The weak rupee, high inflation and fuel prices have also become a political problem for the government, with opposition parties cornering the government on the issues.

A government official, who spoke on condition of anonymity, said there was no plan to extend the scope of windfall tax to natural gas produced in the country.

With the cuts announced on Wednesday, the Centre’s annualized collections from the export taxes will likely decline to 21,000 crore from the previously estimated 66,400 crore, and that from windfall tax on domestic crude oil sales will drop to 50,500 crore from 69,000 crore, Nomura said.

While the reduction in windfall cess is positive for oil explorers such as ONGC and Oil India, the gains will likely be offset by lower net realizations because of the decline in crude prices.

Although the cess imposed on crude oil has been reduced, it remains steep at about $30 per barrel and is likely to adversely impact the profitability of the Indian upstream companies by about 39,000 crore in FY23, according to Prashant Vasisht, vice-president and co-head of corporate ratings at ICRA Ltd.

On the cut in the tax imposed on diesel and jet fuel exports, Vasisht said that the duty would continue to hurt non-special economic zone exporters and adversely impact the realizations.

The impact on fuel exporters’ overall gross refining margin is expected to be in the range of $1-3 a barrel for FY23.

A CLSA report had recently suggested a revision of the taxes amid falling prices.

“The last two weeks have seen a massive crash in the refining spreads of diesel, gasoline and aviation fuel coinciding with a cool-off in crude prices from their respective peaks seen in June. This questions the need for the continuation of the windfall tax, “ it had said last week.

Post windfall tax, the realised spread on diesel and gasoline has fallen to near loss-making levels while the realisation on aviation fuel and crude have also gone below 15-year averages, according to CLSA.

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