MC Explains | Windfall tax: Everything you need to know, and what next

With crude oil prices falling in international markets, the government recently cut the windfall tax on locally produced crude oil and diesel.

After touching an all-time high of $140 a barrel in March, crude oil prices are now trading around $90 a barrel amidst record-high inflation and recession fears.

Windfall tax is levied by governments when an industry unexpectedly earns large profits — primarily due to an unprecedented event.

Crude oil prices had soared from March to May after Russia’s invasion of Ukraine and the supply cut by the Organisation of the Petroleum Exporting Countries (OPEC) and its allies, also known as OPEC+.

Last week, the Centre reduced tax on domestically produced crude oil to Rs 8,000 per tonne from Rs 10,500 per tonne, at the sixth fortnightly review.

The government also scrapped the export tax of Rs 5 per litre on jet fuel and halved the levy on export of diesel to Rs 5 per litre.

“The decline in oil prices led to a downward revision in windfall taxes on domestic oil production from $18/barrel to $13.4/ barrel. The adjustments, while still ad hoc, highlight the producer oil price cap of $75/ barrel and profitability of $20-22/barrel,” Morgan Stanley said in a report on October 3.

Windfall tax, which was introduced on July 1, has been revised five times until now, based on movements of international crude and product prices. Windfall tax was removed for petrol exports on July 20.

Revisions thus far:

July 20: Tax reduced to Rs 17,000 per tonne on domestic crude oil. Export tax on diesel and jet fuel reduced to Rs 11 a litre and Rs 4 a litre, respectively.

August 3: Tax increased to Rs 17,750 per tonne on domestic crude. Export tax on diesel reduced to Rs 5 a litre. Export tax on jet fuel scrapped.

August 19: Tax reduced to Rs 13,000 per tonne on domestic crude. Export tax on diesel increased to Rs 6 a litre. Rs 2 a litre tax levied on jet fuel.

Sept 1: Tax increased to Rs 13,300 per tonne on domestic crude. Export tax on diesel and jet fuel increased to Rs 13.5 a litre and Rs 9 a litre, respectively.

Sept 17: Tax reduced to Rs 10,500 per tonne on domestic crude. Export tax on diesel and jet fuel reduced to Rs 10 a litre and Rs 5 a litre, respectively.

Initially, the government slapped a windfall tax of Rs 23,250 per tonne on domestic crude and imposed an export tax on diesel and jet fuel of Rs 13 a litre and Rs 6 a litre, respectively, on July 1.

Companies call for tax withdrawal

Producers, including state-owned Oil and Natural Gas Corporation (ONGC) and Vedanta-controlled Cairn, are impacted by the windfall tax on domestic crude.

ONGC had urged the government to withdraw profit tax on domestically produced crude oil and instead use the dividend route to tap into the bumper earnings resulting from a surge in global energy prices, PTI had reported earlier.

However, Union Minister for Petroleum and Natural Gas Hardeep Singh Puri has said that windfall tax was under the purview of the finance ministry and the ministry would continue to review it every fortnight.

Windfall tax in second half of FY23

With elections in some states due in the second half of FY23, IIFL Securities said in a report that it needs to be seen how the government deals with issues like reviewing windfall tax on oil and exports.

Earlier in July, when the government had first imposed windfall taxes, Revenue Secretary Tarun Bajaj said India will only withdraw its windfall tax for oil producers and refiners if global prices of crude fall as much as $40 a barrel from present levels.

“The government has ensured a post-windfall tax realisation of $74-77/bbl in the last four fortnights. This should raise investor confidence about realising about $75/bbl, but ONGC’s and Oil India’s shares are pricing in the sub $40/bbl. They remain our top BUYs, with a 55-65 percent potential upside plus double-digit dividend yields,” CLSA said in a report on October 2.

On Wednesday (Oct 5), Brent crude settled at $93.37 a barrel, and US West Texas Intermediate (WTI) crude closed at $87.86, while on July 1--when the government imposed windfall tax--Brent settled at $111.63 a barrel, and WTI settled at $108.43 a barrel.