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What is a windfall tax and why is it back in discussion?

With crude touching a 14-year high of $139 a barrel, there is talk of a tax on oil and gas producers' unexpected profits

May 31, 2022 / 10:04 AM IST
Lack of clarity on windfall tax may have caused a sharp derating of ONGC over the last few years. (Representative imag; Photographer: Andrey Rudakov/Bloomberg)

Lack of clarity on windfall tax may have caused a sharp derating of ONGC over the last few years. (Representative imag; Photographer: Andrey Rudakov/Bloomberg)

With crude prices touching record highs, there is talk of the government asking oil and gas producers to pay a windfall tax. Though in a recent interview the ONGC Chairperson and Managing Director Alka Mittal said that they haven’t received any such communication, here is the quick guide on what such a tax would mean.

Is windfall like a jackpot?

Yes, for when you make a lot of money unexpectedly, and it would be a one-time tax. The oil and gas producers are making plenty of money, all of a sudden, because the Russia-Ukraine conflict has caused a supply disruption, crude prices have touched a 14-year high of $139 a barrel. The companies aren’t making money because they have improved their efficiency or because of any innovation they have done, but they are making these huge profits because of a development that they had no hand in. Therefore, whenever the oil price goes above $70 per barrel, the tax could kick in and these tax proceeds may then be used to subsidise consumers’ fuel bills.But why now?

Such a tax was on the policymakers' mind even in 2018, when oil prices went past $80 a barrel. Then, the US had imposed sanctions on Iran, after former US president Donald Trump pulled out of the Joint Comprehensive Plan of Action (JCPOA).

The tax is back in discussion with oil prices shooting up and inflation on the rise. A few European countries such as Hungary and Italy have already imposed this tax, and last Thursday, the United Kingdom also announced an additional 25 percent levy for a year to raise around £5 billion.

How did the market react?

A few days after reports on the tax were out, the stocks of ONGC and BPCL corrected by 9 percent and 5 percent. In a recent report on ONGC, Nomura noted that the company has “sharply de-rated over the past few years” and clarity the windfall taxes have been the key trigger. It added that every $5-a-barrel change in oil realisation would impact ONGC’s FY23 standalone EPS by 8 percent (Rs 2.67/sh) and every $0.5/mmbtu change in gas realisation, could impact ONGC’s FY23 standalone EPS by 4 percent.

Will it help the government?

Yes, of course. It needs the taxes when the central bank is withdrawing its accommodative stance, when it may have to support the economy with higher spending, and when there is a current account deficit because of rising crude prices. With the government cutting excise duty on fuel–Rs 8 on petrol and Rs 6 on diesel–it stands to lose around Rs 1 lakh crore, which could be made up with the windfall taxes.

But, there are other things the government has to consider. For one, it has signed production-sharing contracts (PSCs) with oil producers, through which the government gets a share of the profits made. Therefore, it stands to lose a share of the profits. Then, the government has been getting generous dividends from PSUs, including the oil and gas producers. Last November, the DIPAM secretary tweeted that ONGC has paid Rs 4,180 crore and BPCL has paid Rs 575 crore in dividends. If profits come down from paying the new tax, these dividends will come down too.

Asha Menon
first published: May 31, 2022 10:04 am