Government increases windfall tax on crude oil to Rs 12,100 per tonne: How much oil has been India producing in recent years?

By: Yash Gupte

Crude prices are currently well above the $90 per barrel threshold, which coincides with the increase in the windfall tax on crude.

The windfall tax on domestically produced crude oil was raised by the central government on Friday from Rs 10,000 per ton to Rs 12,000 per ton. On September 30, 2023, the new rates will take effect. In the meantime, the government also made the decision to lower the windfall tax on the export of aviation turbine fuel (ATF) and diesel, from Rs 3.50 per litre to Rs 2.50 per litre, respectively. The center increased the windfall tax on crude oil in its most recent review, which was dated September 15, from Rs 6,700 per ton to Rs 10,000 per ton.

Diesel's export duty was revised from Rs. 6 per litre to Rs. 5.50 per litre, and duty on aviation turbine fuel (ATF) was decreased from Rs. 4 per litre to Rs. 3.50 per litre. On July 1, 2022, the government levied export taxes on petrol and ATF of Rs. 6 per litre and diesel of Rs. 13 per litre. On sales of domestic crude, a windfall tax of Rs 23,250 per ton was applied.

Crude prices are currently well above the $90 per barrel threshold, which coincides with the increase in the windfall tax on crude. The price of a barrel of Brent for November on the Intercontinental Exchange is currently $95.43, up 0.05 percent from its previous closing. West Texas Intermediate (WTI) was trading at $91.50 a barrel for the November contract, down 0.23 percent from the previous close. As OPEC+ has reduced output and Saudi Arabia and Russia have pledged voluntary cuts, prices continue to rise amid supply concerns. According to analysts, increased demand because of expected winter heating needs might keep prices high.

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. 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.

Saumil Gandhi, senior analyst for commodities at HDFC Securities said: “The global market is still expected to remain tight due to Saudi Arabia’s and Russia’s production cutbacks; therefore, the outlook is still positive. NYMEX WTI crude oil has rallied almost 30 percent since the end of June and is approaching the biggest quarterly gain since April 2022."

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.