Thursday, 10 Oct, 2024
By: Yash Gupte
Every two weeks, the windfall tax rates are adjusted depending on the price of crude oil around the world. Image Source: IANS
The Indian oil companies had made huge profits by selling oil to some European countries after they decided to boycott the Russian oil and gas.
The central government has slashed the windfall tax on domestically produced crude oil to zero from Rs 4,100 per ton on the midnight of May 15, 2023. For petrol, diesel, and aviation turbine fuel (ATF), the windfall tax remained at zero. The government reduced the windfall tax on domestically produced crude oil in early May from Rs 6,400 per ton to Rs 4,100 per ton. The government eliminated the Special Additional Excise Duty (SAED) on exports of fuel last month and it would continue to be zero rupees per litre. ATF (aviation turbine fuel) and petrol exports are still free from windfall taxation. The Central Board of Indirect Taxes and Customs has announced that these tax rate modifications will take effect starting on Tuesday, May 16. Every two weeks, the windfall tax rates are adjusted depending on the price of crude oil around the world. The manufacturing industry, which primarily depends on diesel for transportation and power generation, is expected to benefit from the elimination of the export duty on diesel. Due to their new ability to sell diesel at a more competitive price on the international market, the move will also increase the competitiveness of Indian exporters. Overall, it is expected that the petroleum sector tax structure adjustment will benefit the Indian economy.
When economic conditions permit particular industries to generate above-average profits, governments impose a higher tax rate on those industries, which is known as a windfall tax. Therefore, these earnings are taxed individually in addition to the regular taxes that these corporations pay to the government when any industry benefits from an unexpected external circumstance and makes rapid profits. Indian oil companies like ONGC, Oil India and GAIL had registered their all-time high profits when the price of crude oil in the international market had peaked to the 14 year high of $139 per barrel due to the Russia-Ukraine conflict. The government had then decided to impose windfall tax was due to increasing trade deficit and the depreciation of rupee increasing the value of imports. The government had imposed the windfall tax for the first time in July 2022. The latest change in the windfall tax is the 21st revision since it was first imposed on July 1, 2022 due to a surge in global crude oil prices caused by the Russia-Ukraine war.
The Indian oil companies had made huge profits by selling oil to some European countries after they decided to boycott the Russian oil and gas. This created a shortfall of the commodity in the Indian domestic market and in order to keep the supply unaffected, the government imposed the windfall tax on exports to make oil exporting more expensive. Apart from India, USA, UK, Italy, Romania and European Union have also been imposing similar tax.
According to Hardeep Singh Puri, minister of petroleum and natural gas, profits for Indian Oil Corporation Limited grew from Rs 1,313 crore in 2019–20 to Rs 24,184 crore in 2021–20. Similar to this, the Bharat Petroleum Corporation Limited (BPCL) registered a profit of Rs 8,789 crore in 2021-2022 as opposed to Rs 2,683 crore and Rs 19,042 crore in 2020-21 and 2019-20, respectively. In just three years, Hindustan Petroleum Corporation Limited (HPCL) has seen a nearly threefold growth in earnings. The company's earnings increased to Rs 6,383 crore in 2021-22 from Rs 2,637 crore in 2019-20.
Source: Ministry of Petroleum and Natural Gas
Cumulative crude oil production during April-March, 2022-23 was 29178.56 TMT, which is 8.41 percent lower than target for the period and 1.73 percent lower than production during corresponding period of last year respectively.
India produces less than one-fifth of its oil requirements and imports the rest. But even the meagre amount of oil produced in the nation is falling off every year. In 2014–15, India produced 37.5 million tons of its own oil, but by January 2021, that production had dropped to just 25.6 million tons. In the past, the government has attributed the decline in oil production on depleted fields and reservoir issues. However, there are a lot of additional factors causing the slide. According to a report by Care Ratings, the Covid-19 pandemic's technical disruptions, well closures, and delays in field development efforts are the reasons behind India’s declining crude oil production.
The decrease in windfall tax is a result of the recent drop in the price of crude oil on the world market. Oil is down 11 percent this year as the demand picture is hampered by China's sluggish recovery and a likely US recession. However, on Tuesday, the price of oil increased for a second day in a row due to supply concerns brought on by raging wildfires in Canada and America's plans to buy oil for its Strategic Petroleum Reserve (SPR). U.S. West Texas Intermediate crude increased by 27 cents, or 0.38 percent, to $71.38 a barrel, while Brent crude futures increased by 30 cents, or 0.4 percent, to $75.53 per barrel.
Prashant Vasisht, vice president and co-group Head - corporate ratings, ICRA Ltd, said, "Crude oil prices have been on a downward trend, erasing all the gains that were witnessed post the OPEC+ production cuts. The decline has been largely owing to the recessionary fears in large economies of the world. Moreover, the SAED on the export of petroleum products remains nil. At these rates, ICRA expects government collections to be Rs 1,500 crore for FY2024 (April 2023 to March 2024).”
According to Pankaj Kumar, director of production at Oil and Natural Gas Corporation (ONGC), the state owned corporation is stepping up a USD 7 billion investment over the next three-four years to reverse years of decline in oil and gas production. He said, "Most of our fields are old where natural decline has set in. But we are heavily investing in technology to raise recovery as well as tap isolated reservoirs." Currently, around 24 field development, improved oil recovery (IOR) projects are in progress that will contribute in reversing the declining trend in oil and gas production.
The government has also announced fiscal incentives on new discoveries, incentives for enhanced oil and gas recovery, allowed exploration and exploitation of unconventional hydrocarbons in nomination fields, and undertaken production enhancement contracts with private players for small fields in an effort to make crude oil production appear more lucrative. Nevertheless, the nation's declining oil production pattern is still present. But in recent times, the fall in domestic crude oil production doesn’t seems to be a cause of worry as India has been importing crude oil from Russia at cheaper rates.
