Govt slaps Rs 66,000 crore windfall tax on crude oil production; introduces export levy on petrol, diesel, ATF

The export tax is to deter companies such as Reliance Industries and Rosneft-based Nayara Energy from preferring overseas markets over domestic supplies.

Giving out reasons for the introduction of the new levies, Finance Minister Nirmala Sitharaman said ”phenomenal profits” earned from abnormal prices that refiners earned from shipping overseas led to the new taxes.

”We don’t grudge people earning profits,” she said. ”But if oil is not being available (at petrol pumps) and they are being exported… exported with such phenomenal profits. We need at least some of it for our own citizens and that is why we have taken this twin-pronged approach.”

”It is not to discourage exports, it is not to discourage India as a refining hub. It is certainly not against profit earning, but extraordinary times do require some such steps,” Sitharaman said.

The windfall tax on oil producers was triggered by Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) reporting bumper profits in the March quarter (when international prices soared to a near 14-year high of USD 139 per barrel) and record earnings in 2021-22.

ONGC reported a record net profit of Rs 40,306 crore on a revenue of Rs 1,10,345 crore in the 2021-22 fiscal. OIL posted Rs 3,887.31 crore net profit in the fiscal.

Vedanta’s Cairn Oil & Gas, which is India’s second-largest oil producer, too had bumper earnings. The new levy plus the oil industry development cess and royalty the producers currently pay will take the total incidence of taxation to about 60 per cent of the oil price.

A windfall tax is a one-off tax on companies that have seen their profits surge extraordinarily not because of any clever investment decision they have taken or an increase in efficiency or innovation, but simply because of favourable market conditions.

Recently, the UK levied a 25 per cent tax on ”extraordinary” profits from North Sea oil and gas production to raise USD 6.3 billion.

The export tax follows oil refiners, particularly Reliance Industries and Rosneft-backed Nayara Energy, making a killing in exporting fuel to deficit regions such as Europe and the US in the aftermath of Russia’s invasion of Ukraine.

They are said to have processed Russian crude oil available at a discount after it was shunned by the West and exported fuel produced from it to Europe and the US.

The government also framed new rules requiring oil companies exporting petrol to sell in the domestic market the equivalent of 50 per cent of the amount sold to overseas customers for the fiscal year ending March 31, 2023.

For diesel, this requirement has been put at 30 per cent of the volume exported. These restrictions on export are also aimed at shoring up domestic supplies at petrol pumps, some of which had dried up in states like Madhya Pradesh, Rajasthan and Gujarat as private refiners preferred exporting fuel to selling locally.

Exports were preferred as retail petrol and diesel prices by dominant PSU retailers have been capped at levels way lower than the cost. This meant that private retailers, who control less than 10 per cent of the market share, either sell fuel at loss or lose market share if they were to sell at a higher cost.

Revenue Secretary Tarun Bajaj said the export tax will be applied uniformly on all exports from any refinery, be it a domestic unit or an only-for-exports (SEZ) facility. But the export restriction, mandating a certain amount to be sold locally, will not be applicable for SEZ units, he said.

Reliance operates two refineries at Jamnagar in Gujarat — one is a domestic tariff area facility while the other is an SEZ refinery. Nayara has a domestic tariff area unit at Vadinar in Gujarat.

The finance ministry, in a statement, said crude prices have risen sharply in recent months which has benefited domestic producers who sell oil to domestic refineries at international parity prices.

”As a result, the domestic crude producers are making windfall gains. Taking this into account, a cess of Rs 23,250 per tonne has been imposed on crude,” it said. ”Import of crude would not be subject to this cess.”

Small producers, whose annual production of crude in the preceding financial year is less than 2 million barrels, will be exempt from this new cess, the ministry said.

”Also, to incentivise an additional production over the preceding year, no cess will be imposed on such quantity of crude that is produced in excess of last year’s production by a crude producer.”

The ministry said while crude prices have increased sharply in recent months, the rates of diesel and petrol have shown a sharper increase.

”The refiners export these products at globally prevailing prices, which are very high. As exports are becoming highly remunerative, it has been seen that certain refiners are drying out their pumps in the domestic market,” it said without naming any company. In view of this, cesses equal to Rs 6 per litre on petrol and Rs 13 per litre on diesel have been imposed on their exports.

These cesses would apply to any export of diesel and petrol from the country. In view of this, cesses equal to Rs 6 per litre on petrol and Rs 13 per litre on diesel have been imposed on their exports.

”These measures would not have any adverse impact on domestic retail prices of diesel and petrol. Thus, domestic retail prices would remain unchanged. At the same time these measures will ensure domestic availability of the petroleum products,” it said.

A special additional excise duty (SAED) of Rs 6 per litre has been imposed on exports of Aviation Turbine Fuel (ATF). Like diesel and petrol, the international prices of ATF have risen sharply and so an additional duty has been imposed.