Windfall tax to recover revenue of Rs 1 lakh crore lost by deduction in excise duty
Industry sources said the unexpected tax on oil produced within India and fuel exported abroad would result in a loss of more than three-fourths of the government’s revenue when it cut excise duty on petrol and diesel so that inflation can be reduced. India on July 1 joined a select league of countries globally to have taxed oil companies on windfall gains from rising energy prices. The government has imposed a tax of Rs 6 per liter on the export of petrol and jet fuel (ATF) and Rs 13 per liter on the export of diesel with effect from July 1.
Additionally, a tax of Rs 23,250 per tonne was imposed on domestically produced crude. The tax on crude oil producers such as Oil and Natural Gas Corporation (ONGC), Oil India Ltd and Vedanta Ltd will fetch the government Rs 69,000 crore annually, which translates to 29.7 million tonnes of oil in the 2021-22 financial year (April 2021 to March 2022). Looking at the production. , said two sources with knowledge of calculations. For the remaining nine months of the current financial year, the levy will get the government around Rs 52,000 crore if the tax remains in place till March 31, 2023. On top of this, a new tax was introduced on the export of petrol, diesel and . ATF will bring in additional revenue.
“India exported 2.5 million tonnes of petrol, 5.7 million tonnes of diesel and 797,000 tonnes of ATF during April and May. Even if these quantities fall by a third due to the new levy and other restrictions, the government will still be richer if the tax At least Rs 20,000 crore if it continues till March 2023,” said one of the sources.
Reliance Industries Ltd. operates 35.2 million tonnes of oil refinery at Jamnagar in Gujarat for export only in a year and overseas shipments from the refinery are expected to continue, the second source said. Some exports are also expected from the refinery built to meet the requirements of the domestic market, which is associated with the company’s 33 million tonnes per annum refinery. “Reliance has a fuel retailing JV with BP and this JV operates 1,459 out of 83,423 petrol pumps in the country. Even after meeting the entire requirement of 1,459 petrol pumps and selling some fuel to PSU retailers , it will still remain exportable surplus,” the source said.
Similarly, Rosneft-backed Naira Energy operates a 20 million tonne annually refinery at Vadinar in Gujarat. It has 6,619 petrol pumps, whose overall requirement will be less than the approximately 12 million tonnes of petrol, diesel and ATF that the refinery produces annually. Sources said the two taxes together will generate Rs 72,000 crore or more than 85 per cent of the revenue that the government had from cutting excise duty on petrol and diesel.
The government had on May 23 cut excise duty on petrol by Rs 8 per liter and on diesel by Rs 6 per liter to pacify record inflation. According to a statement made by Finance Minister Nirmala Sitharaman at the time, the cut in excise duty would result in a loss of Rs 1 lakh crore annually to the exchequer. The revenue foregone for the remaining 10 months of the current financial year was around Rs 84,000 crore. Sources said the windfall tax would help bridge 85 per cent of this deficit.
The export tax is to prevent companies like Reliance and Naira from giving preference to foreign markets over domestic supplies. The two refiners are among India’s biggest buyers of discounted Russian crude this year and are making huge profits by aggressively ramping up fuel exports to regions such as Europe, where many buyers are avoiding imports of Russian oil. Giving reasons for the introduction of the new levy, Sitharaman had said on Friday that refiners earned “unprecedented profits” from shipping abroad, reducing domestic supplies. “We are not angry with profit-making people,” he had said.
“But if oil is not becoming available (at petrol pumps) and they are being exported…with such phenomenal profits, we need at least something for our citizens and that’s it. That is why we have taken this dual approach.” The government also framed new rules for oil companies exporting petrol to sell in the domestic market for the financial year ending March 31, 2023, which is equivalent to 50 per cent of the amount sold to foreign customers.
For diesel, this requirement has been kept at 30 per cent of the exported quantity. Reliance’s lone export refinery is exempted from 30/50 per cent domestic supply norms. The ban on exports is aimed at curtailing domestic supplies at petrol pumps, some of which had dried up in states such as Madhya Pradesh, Rajasthan and Gujarat as private refiners preferred to export the fuel to sell locally. Priority was given to exports as retail petrol and diesel prices have been capped at below cost rates by major public sector retailers. This means that private retailers, which control less than 10 percent of the market share, either sell fuel at a loss or lose market share if they have to sell at a higher price. So they choose to cut sales.
Unexpected tax on oil producers was triggered by ONGC and OIL reporting bumper profits in the March quarter (when international prices hit a near 14-year high of $139 a barrel) and record earnings in 2021-22. ONGC reported a record net profit of Rs 40,306 crore in FY 2021-22 on revenue of Rs 1,10,345 crore. OIL made a net profit of Rs 3,887.31 crore in the financial year.
Vedanta’s Cairn Oil & Gas, which is India’s second largest oil producer, also made bumper earnings. The new levy, which translates to US$40, plus the oil industry development cess and royalties currently paid by producers, will bring the total incidence of taxation to about 60 percent of the price of oil. Windfall tax is a one-time tax on companies that have seen their profits increase exceptionally, not because of any smart investment decisions made by them or an increase in efficiency or innovation, but simply because of favorable market conditions. Most recently, the UK imposed a 25 percent tax on “extraordinary” profits from North Sea oil and gas production to raise USD 6.3 billion to help fund its support package.
Read also | Central government imposed tax on petrol, diesel exports; imposes unexpected tax on crude oil