The windfall tax on oil produced in India and fuel exported overseas will account for more than three quarters of the revenue the government lost when it cut excise taxes on petrol and diesel to cool rising inflation, industry sources said.
On July 1, India joined an elite league of countries worldwide that have taxed the windfall benefits accruing to oil companies from rising energy prices.
The government has introduced a tax of Rs 6 per liter on petrol and aviation fuel (ATF) exports and Rs 13 per liter on diesel with effect from 1 July.
In addition, a tax of Rs 23,250 per tonne was levied on domestic crude oil.
The tax on crude oil producers like Oil and Natural Gas Corporation (ONGC), Oil India Ltd and Vedanta Ltd alone will bring the government Rs 69,000 crore per year considering 29.7 million tons of oil production in fiscal year 2021- 22 (April 2021 to March 2022). ), according to two sources with knowledge of the calculations.
The levy would bring the government close to Rs 52,000 crore for the remaining nine months of the current fiscal year if the tax remains in effect until March 31, 2023. In addition, the new tax on the export of petrol, diesel and ATF would generate additional revenue.
“India exported 2.5 million tons of petrol, 5.7 million tons of diesel and 797,000 tons of ATF in April and May. at least Rs 20,000 crore if the tax continues until March 2023,” said one of the sources.
Reliance Industries Ltd operates an export-only oil refinery of 35.2 million tons per year in Jamnagar, Gujarat. The second source said the refinery is expected to continue shipping overseas even with the new tax.
Some experts are also expected from the adjacent 33 million tpa refinery intended to serve the domestic market.
“Reliance has a fuel retail joint venture with BP, which operates 1,459 of the country’s 83,423 gas stations. It is surplus,” the source said.
Similarly, Rosneft-backed Nayara Energy operates a 20 million tpa refinery at Vadinar in Gujarat. It has 6,619 gas pumps whose entire need would be less than 12 million tons of gasoline, diesel and ATF that the refinery produces annually.
The two taxes together will add up to Rs 72,000 crore or more than 85 percent of the revenue the government lost by cutting excise duties on petrol and diesel, sources said.
The government had cut the excise tax on petrol by Rs 8 per liter and diesel by Rs 6 per liter on May 23 to cool the record inflation rate.
According to a statement by the then finance minister, Nirmala Sitharaman, these tax cuts would dent the treasury by Rs 1 lakh crore annually.
For the remaining ten months of the current fiscal year, the lost revenue amounted to approximately Rs 84,000 crore. And the windfall tax is helping to bridge 85 percent of this shortfall.
The export tax prevents companies like Reliance and Nayara from favoring overseas markets over domestic deliveries.
The two refineries are India’s largest buyers of discounted Russian crude this year. They have made huge profits by aggressively boosting fuel exports to regions like Europe, where many buyers avoid importing Russian oil.
Ms Sitharaman explained the reasons for the introduction of the new tariffs and said on Friday that refineries were making “phenomenal profits” from shipping overseas while reducing domestic inventories. “We don’t hold a grudge against people who make a profit,” she had said.
“But if there is no oil available (at gas pumps) and they are exported… exported with such phenomenal profits. We need at least some of it for our citizens, which is why we took this two-pronged approach.”
The government also enacted new rules requiring oil companies that export gasoline to sell domestically, the equivalent of 50 percent of the amount sold to foreign customers, for the fiscal year ending March 31, 2023.
This requirement is set at 30 percent of the exported volume for diesel. The export-only refinery is exempt from 30/50 percent domestic supply rules.
The export restrictions are also intended to bolster domestic supplies at gas pumps, some of which had dried up in states such as Madhya Pradesh, Rajasthan and Gujarat, as private refineries favored exporting fuel over local sales.
Exports have been preferred as retail gasoline, and diesel prices by dominant PSU retailers have been capped at rates far below cost. This meant that private retailers, which hold less than 10 percent of the market share, sell fuel at a loss or lose market share if they sell at a higher cost. So they choose to reduce sales.
The windfall tax on oil producers was caused by ONGC and OIL reporting huge gains in the March quarter (when international prices soared to a nearly 14-year high of $139 a barrel) and record profits in 2021-22.
ONGC reported a record net profit of Rs 40,306 crore on revenue of Rs 1,10,345 crore in fiscal year 2021-22. OIL posted Rs 3,887.31 crore net profit in the fiscal year.
Vedanta’s Cairn Oil & Gas, India’s second largest oil producer, also posted record profits.
The new tax, which translates to $40, plus the development tax and oil industry royalties currently paid by producers, will bring the total tax burden to about 60 percent of the oil price.
A windfall tax is a one-time tax on companies that have seen their profits increase dramatically, not because of a smart investment decision they made or an increase in efficiency or innovation, but simply because of favorable market conditions.
Recently, the UK levied a 25 percent tax on “extraordinary” profits from North Sea oil and gas production to raise $6.3 billion to help fund its bailout package.