Wednesday, 09 Oct, 2024
By: Yash Gupte
Major cities like Delhi and Mumbai experienced no change in fuel costs, despite slight fluctuations in the price of petrol and diesel in some cities. Image Source: IANS
According to a government statement, the tax on crude oil produced by companies like the state-owned Oil and Natural Gas Corporation (ONGC) increased to Rs 11,000 per ton from October 16 from Rs 8,000.
The central government on 16 October 2022, raised the windfall tax on domestically produced crude oil by more than a third after a reported increase in the international oil prices. In response to the spike in global oil prices, the government increased the windfall tax on domestically produced crude oil by more than a third on Saturday. It also increased the rate on diesel exports by twofold and reinstated the tax on the export of jet fuel (ATF). According to a government statement, the tax on crude oil produced by companies like the state-owned Oil and Natural Gas Corporation (ONGC) increased to Rs 11,000 per ton from October 16 from Rs 8,000.
Why did the government impose Windfall tax?
The government increased the rate on diesel export from Rs 5 per litre to Rs 12 per litre as part of the fortnightly modification of the windfall tax. At the beginning of this month, the tax on jet fuel was reduced to zero and then reinstated at Rs 3.50 per litre. Though there has been an increase in the windfall tax, it is unlikely to affect the pricing of petrol and diesel set by oil marketing corporations each night. Major cities like Delhi and Mumbai experienced no change in fuel costs, despite slight fluctuations in the price of petrol and diesel in some cities. But one question which comes to the mind is that what exactly is this windfall tax on domestic crude oil production and why is it being imposed?
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, in this case, the oil and gas industry, benefits from an unexpected external circumstance (the Russia-Ukraine war) and makes rapid profits.
How the government tends to benefit from the windfall tax?
Indian oil companies like ONGC, Oil India and GAIL 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 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 above paragraph explains the government’s motive behind imposing the windfall tax on oil production, now let us understand the reason for imposition of the tax on the exports of oil. The Indian oil companies 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.
If the windfall tax on production and exports is kept in place for the entire year, it is projected to generate a revenue of Rs 65,600 crore and Rs 52,700 crore from tax on exports.
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.
Why there has been a cut in oil production?
The major oil exporters of the crude oil in the world or the OPEC+ recently reached a mutual consensus to cut the oil production by two million barrels per day. The OPEC+ countries have taken this decision to boost the oil prices in the international market as demand and supply is the basic principle upon which the oil prices fluctuate. The move has been made with the aim of boosting the cost of oil, which has fallen below $90 from a peak of $122 in June. The cut in oil production has created tensions between USA and Saudi Arabia as the former is against the cuts and has warned the kingdom of strong actions like sanctions, penalties and ending arms sales. The Western allies are attempting to stop limit Russia’s oil profits after it invaded Ukraine when the OPEC+ coalition decides to reduce 2 million barrels per day beginning next month. Even without sanctions, Western traders avoided Russian oil, but consumers in India and China snapped up those barrels at a deep discount, so the supply disruption wasn't as severe as anticipated. Producers of oil are concerned about a sharp drop in prices if the global economy declines more quickly than anticipated.
Though the cut in oil production is expected to increase the global crude oil prices, countries like India and China will continue to benefit from the Russian oil.
