Explained: Why India reduced windfall tax on diesel, aviation fuel and scrapped levy on petrol

Trade

• Watchlist
• Portfolio
• Message
• Set Alert

 

 

live

• bselive
• nselive

Volume

Todays L/H

More

×

Less than three weeks after they were imposed, the government has removed the levy on petrol and reduced windfall taxes on other fuels.

In view of the rising demand for fuel and to address the fuel shortage, the government introduced export duties on petrol, diesel and aviation turbine fuel (ATF) on July 1. It also imposed a windfall tax on oil producers who had been profiting from higher global crude oil prices. The government made its stance clear that requirements of the domestic market was a priority.

Then why has the government eased the levies? This explainer looks at that and more.

What’s new?

• Additional tax on domestically produced crude oil tax reduced to Rs 17,000/tonne from Rs 23,250.
• Export duties are exempted on units located in special economic zones (SEZs).
• Diesel export duties reduced to Rs 10/litre from Rs 13.
• Petrol export duties scrapped.
• Export duty on ATF lowered by Rs 2 to Rs 4 per litre.

Why were the taxes levied in the first place?

In May, fuel retailers cautioned the central government that oil marketing companies or OMCs were rationing fuel supplies for retail sales to curb their losses and that it may lead to shortages and consequent law and order problems. OMCs were doing so as they had not been able to increase prices despite rising crude oil prices and a falling rupee. By June, the fuel shortage at retail outlets worsened, forcing many petrol pumps across the country to cut down working hours and in some cases shut down after they went dry. The levy was announced on fuel to ensure sufficient fuel availability in the country and the government had asked OMCs to ensure supply to outlets.

The government also imposed a cess, by way of special additional excise duty or windfall tax, on locally produced crude oil that was sold at international parity prices as global prices had soared and had led to windfall gains for these companies.

Why was the duty structure changed?

A significant correction in global crude oil prices and subsequent correction in gross refining margin (GRM) resulted in erosion of gains being made by these companies and prompted the government to ease the levies.

The benchmark Brent price has corrected to an average $111.60 a barrel in July to date from an average of $120 a barrel in June. The benchmark GRM corrected to $13.50 a barrel from $25 in the same period.

Companies that will benefit

Brokerages expect that the key beneficiaries of the government easing the levies would be Reliance Industries Ltd, Oil India Ltd and ONGC Ltd. Shares of all three companies gained after the news.

Morgan Stanley said in a report, “Reliance Industries, Oil India Ltd and ONGC will see a reduction in overhang and equity valuations should start pricing in high sustainable energy margins as government intent gets clear. We believe RIL should get priced at $13-15/barrel sustainable refinery margins while ONGC gets priced at $75-80/bbl oil and $6/mmBtu (million British thermal units) commodity deck.” The brokerage said that this would imply 25-40 percent upside to equities as energy markets are expected to remain tight despite the current volatility in oil and reduction in global fuel margins from peak levels.

The government’s clarification that export-oriented refineries fall under the ambit of SEZ and will now be exempt from windfall taxes would significantly help Reliance Industries and protect the government’s export-friendly image, brokerages said.

Brokerage CLSA said this is a positive for the company as 55 percent of its refining production comes from its export refinery. With this clarification as well as the windfall tax cut, CLSA expects the refining margin of the company to fall from $10-11 a barrel to $3-4. “We are assuming only a $2/bbl YoY (year-on-year) rise in FY23 refining margin of Reliance as compared to a $14/bbl YoY rise that we see in the Asian benchmark GRM in FY23- till date,” CLSA said.

Disclosure: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.