Reducing the windfall tax on crude oil has given oil producers a breath of fresh air. Let’s explore what it means for the government and investors.
As the banking crisis in the US has sparked global recession fears, even the crude oil prices have felt its impact. The crude oil prices have dropped below $75. But amidst the uncertainty, the Government of India is taking proactive steps and has announced a crucial decision regarding crude oil production companies.
What’s Happening?
The winds of change are blowing through India’s petroleum industry as the government has announced a tax change. The windfall tax on crude petroleum has been reduced by a staggering Rs 900 per tonne, from Rs 4,400 to Rs 3,500 per tonne.
At the same time, diesel exports have seen an increase in duty by Rs 0.50 per litre, with the export duty now standing at Re 1 per litre. But, as they say, every cloud has a silver lining, with petrol and jet fuel (Aviation Turbine Fuel) having a gala time as they have been exempt from tax.
Firstly, you might be wondering, what exactly is this windfall tax?
What is Windfall Tax?
If a company makes huge profits because of a sudden event, the government levies an extra tax on the company, called the windfall tax.
So, when crude oil prices skyrocketed due to the Russia-Ukraine war, oil companies made abnormally high profits. That’s when the government decided to impose a windfall tax on them, so they could take a slice of the pie and put it to good use.
When the international price of crude oil increases, oil refineries and producers make a lot of profit, but if the price goes down, their profits decrease. That’s when the windfall tax can hit them hard. The government can adjust the tax rate according to the situation to deal with this.
In India, the government announced in 2022 that it would impose a windfall tax on profits made by oil companies, including diesel and ATF (Aviation Turbine Fuel), starting from 1st July 2022. However, later they decided to exclude petrol and ATF from the tax.
Recently, on 4th March 2023, the Indian government made a small increase to the windfall tax. They raised the tax rate on crude oil from Rs 4,350 per tonne to Rs 4,400 per tonne. Now, they have reduced the same by Rs 900 per tonne.
What’s in it for Investors?
When it comes to private refineries, Reliance Industries Ltd and Nayara Energy, based on Rosneft, are the leading exporters of fuels such as diesel and ATF. At the same time, ONGC continues to play a significant role in crude oil production.
Oil companies benefit directly when the government reduces the windfall tax on crude oil. On the other hand, if we look at history, in July 2022, the government had to reduce the windfall tax only three weeks after imposing it on oil companies. Shares of oil refining companies jumped over 10% in early trade after the news of the windfall tax reduction surfaced.
What’s Next?
Recently, many countries, including India, have been taking action to curb the strong profits of these companies. The Indian government has announced plans to collect a staggering Rs 25,000 crore from special additional excise duty by implementing a windfall tax this fiscal year.
According to the Economic Times, this tax was expected to compensate for the reduction in excise duty on petrol and diesel to give relief to the consumers. But the tax cut at the initial stage itself is expected to reduce the receipts for the government.
As the sector continues to evolve, it remains to be seen how governments worldwide will balance the interests of consumers and industry players. For investors, these changes may present new opportunities but also require a careful assessment of the risks and uncertainties involved.
*Companies mentioned in the article are for information purposes only. This is not investment advice.
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