Thursday, Aug 18, 2022

Windfall Tax On Reliance Industries, ONGC Gives Modi Fiscal Space To Push India's Growth

The oil refiners in India will now pay Rs 6 per litre on the export of petrol and aviation turbine fuel (ATF) as well as Rs 13 on the export of diesel

Source: Shutterstock
Source: Shutterstock

Rising crude oil prices have caused immense damage to the Indian economy over the past few months. Not only has it sent the price of petrol and diesel in India to an all-time high, but its cascading impact on other sectors has also pushed inflation to a historic high forcing the Reserve Bank of India to raise interest rates, which will affect GDP growth in the current fiscal year.

Under pressure from the opposition to control inflation, Prime Minister Narendra Modi's government had to announce excise duty cuts of Rs 8 and Rs 6 per litre on petrol and diesel on May 23, respectively. But that provided no respite to the government as excise duty cut would have resulted in expenditure cuts by the centre in order to keep its debt-to-GDP ratio under control. But now, there’s a silver lining visible to the government.  

If things go well, not only will it allow the government to make up for the loss to the exchequer incurred due to a cut in excise duties on petroleum products, but it will also curb fuel inflation in the country.

The government has realized that apart from rising crude oil prices in the international market, a key reason for the high cost of fuel in India was the higher margins available to crude oil refiners in exports.

In order to force oil refiners like Reliance Industries, and Mangalore Refinery and Petrochemicals Limited (MRPL) to sell less in the international markets, the Modi government has imposed a windfall tax with effect from July 1. As a result, oil refiners in India will now pay Rs 6 per litre on the export of petrol and aviation turbine fuel (ATF) as well as Rs 13 on the export of diesel. The government has also imposed a windfall tax on domestic crude oil producers like ONGC that were benefiting from high international crude oil prices.

In a press release, the government had said, “The domestic crude producers sell crude to domestic refineries at international parity prices. As a result, domestic crude producers are making windfall gains. Taking this into account, a cess of Rs 23,250 per tonne has been imposed on crude. Import of crude oil would not be subject to this cess.”

Refiners and Producers’ Loss Is Government’s Gain

The government had lost as much as Rs 1 lakh crore in revenue owing to the cut in excise duty on crude oil earlier this year. Experts believe that the windfall tax on domestic oil-producing companies will help recover this amount.  

Notably, the windfall tax was triggered after domestic oil retainers recorded bumper earnings in the March quarter amidst record crude oil prices in the international market at $114 per barrel due to the war. While ONGC reported a whopping net profit of Rs 40,306 on revenue of Rs 1,10,345 crore in FY 2021-22, Vedanta’s Cairn Oil & Gas also reported a high profit. Both Vedanta and ONGC are leading oil producers in the country. 

According to a PTI report windfall tax on ONGC, as well as Vedanta Ltd, will help the government in earning Rs 69,000 crore annually considering 29.7 million tonnes of oil production between April 2021 and March 2022. 

Similarly, Reliance Industries, which exports a whopping 35.2 million tonnes of crude oil from its Jamnagar refinery, is expected to continue shipment overseas even after the windfall tax is imposed. The firm’s 33 million tonnes a year refinery is likely to meet the domestic crude oil demand as well. 

“Reliance has a fuel retailing joint venture with BP and that joint venture operates 1,459 out of 83,423 petrol pumps in the country. Even after meeting the full requirement of the 1,459 petrol pumps and selling some fuel to PSU retailers, it still would be left with an exportable surplus,” the sources said. 

Apart from the big oil players, small oil producer Nayara Energy which is backed by Russian oil company Rosneft has as many as 6,619 petrol pumps. Moreover, the company’s crude oil requirement is less than 12 million tonnes compared to its 20 million tonnes a year refinery in Gujarat’s Vadinar. 

The export tax will deter both Reliance and Nayara from preferring overseas supply over the domestic market. 

Putting Pressure On Refiners To Bring Down Prices In India

Reports suggest that Indian refiners were buying crude oil at a discounted rate from Russia but were not passing on the benefits to Indian retailers due to higher margin availability in the international market. 
With the government's move to impose export tax on oil refineries, the domestic availability of petrol and diesel is likely to increase, bringing down the retail price of the fuel in the country. 

According to estimates by a PTI report, if the existing tax remains unchanged till March 2023, the levy would help the government raise Rs 52,000 crore for the remaining nine months of the current fiscal year. For the remaining 10 months of the current fiscal, the revenue foregone was about Rs 84,000 crore. And the windfall tax will help bridge 85 per cent of this deficit. 

According to PTI, the new levy which translates into $40, in addition to the cess on oil industry development as well as the fee charged by producers as royalty will take the total incidence of taxation to about 60 per cent of the oil price. 

Union Finance Minister Nirmala Sitharaman previously said that an excise duty cut on petrol and diesel will have revenue implications of around Rs 1 lakh crore a year for the government.