India imposes windfall tax on oil producers. What it means?

  • The government has announced taxes on windfall gains made by crude oil producers

Updated1 Jul 2022
The government has announced taxes on windfall gains made by crude oil producers
The government has announced taxes on windfall gains made by crude oil producers(AP)

The government has announced taxes on windfall gains made by crude oil producers. The government slapped a 23,230 per tonne additional tax on domestically produced crude oil to take away windfall gains accruing to producers from high international oil prices.

The new taxes, announced in government orders, will dent the earnings of refiners like Reliance Industries Ltd (RIL) and Nayara Energy, part owned by Russian oil major Rosneft, and oil producers Oil and Natural Gas Corp, Oil India Ltd and Vedanta Ltd.

Shares of Reliance Industries, Mangalore Refinery and Petrochemicals, Vedanta and Oil and Natural Gas Corp (ONGC) fell sharply after the news.

The government has introduced export duties for petrol, diesel and aviation turbine fuel (ATFs) on Friday to help boost domestic supplies, while also imposing a windfall tax on oil producers that have benefitted from higher global crude oil prices. It has also mandated exporters to meet the requirements of the domestic market first.

As per the government's notification on Friday, domestic crude producers sell crude to domestic refineries at international parity prices. As a result, the domestic crude producers are making windfall gains. Taking this into account, a cess of 23,250 per tonne has been imposed on crude. Import of crude would not be subject to this cess.

The move will help ease shortages as India has been forced to step up imports of the fuels, with gasoline imports rising to about 13,000 barrels a day in the first half of June, a seven-month high.

The rare uptick has been driven by a need to cover local shortfalls even as India has emerged as a top buyer of shunned Russian crude following the invasion of Ukraine, and its refiners go all out to produce fuels. Elevated international product prices have prompted India’s private refiners to boost exports, creating a shortage that state processors are now rushing to address with extra imports.

“Reliance is witnessing a sharp fall after the Government has levied taxes on windfall gains made by domestic refineries. Earlier Reliance was firing on all cylinders but now there is a break in its refinery business as the commodity cycle is also reversing however other verticals have strong growth potential,” said Santosh Meena, Head of Research, Swastika Investmart Ltd.

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