Govt imposes windfall tax on oil producers, raises import duty on gold :-Business Standard

 

The Centre on Friday slapped a windfall tax on domestic crude oil producers, imposed export duties on petrol, diesel and aviation turbine fuel (ATF), and hiked the import duty on gold in efforts to reduce pressure on the rupee, rein in the current account deficit (CAD), and increase the domestic supply of petroleum products.

Domestic producers sell crude oil to domestic refineries at international parity prices, thus making windfall gains.

The government also imposed special additional excise duties of Rs 6 and Rs 13 per litre on the export of petrol and diesel, respectively, following a shortage of the fuel for almost a month. A majority of private outlets had stopped fuel supplies, forcing the government to resort to expanding the universal service obligations (USO) to the private sector as well. The USO required them to maintain supplies at specified working hours and at “reasonable prices”.

While private oil companies continue to earn windfall profits, the Centre’s decision in May to cut the excise duty on petrol by Rs 8 and on diesel by Rs 6 per litre to reduce inflationary pressures is expected to cost the exchequer Rs 85,000 crore in FY23.

Finance Minister Nirmala Sitharaman told reporters that in extraordinary times like these, the government had opted for a two-pronged approach to boost domestic fuel supplies and earn additional revenues. “We want India to become a refining hub. We are happy that (fuel) exports are happening. We are happy that companies are making profits, but (these are) phenomenal profits. We need at least some of it for our own citizens. At a time when we don’t have enough domestic supplies, I also have to keep India’s consumers in mind,” she said on Friday.

The government’s decision to have an additional cess of Rs 23,250 per tonne by way of an special additional excise duty on crude is going to have a major impact on companies like state-run Oil and Natural Gas Corporation (ONGC), Oil India, Vedanta’s Cairn Oil and Gas, and Reliance Industries (RIL). The decision may fetch the government around Rs 67,400 crore per annum, as the country produces around 29 million tonnes of crude oil a year.

Small producers, whose annual production of crude in the preceding financial year was less than 2 million barrels, will be exempt from this cess. “This defies any rationale. Windfall tax has to be ad valorem and linked to the profit. So this is not windfall tax; it is a levy,” said R S Sharma, former chairman and managing director of ONGC.

Shares of ONGC and Oil India declined 13.3 per cent and 14.8 per cent, respectively, on Friday. The two state-run majors jointly produce 72 per cent of the total domestic crude oil of about 30 million tonnes. The average crude oil price realisation for both the companies was expected to rise to $90-100 a barrel in 2022-23, as compared to $70 a barrel in 2021-22.

The decision was taken after crude oil prices increased by over 40 per cent in 2022 owing to the sanctions imposed by various countries on Russia, following the Ukraine war.

The Centre’s decision also came two days after giving a boost to the industry by providing marketing freedom to domestic crude oil producers, a move that would have helped in increasing domestic production.

The government said the current cess would have no adverse impact on domestic petroleum products or fuel prices as the cess would not be applicable to the import of crude oil. However, giving a small relief to the producers, no cess will be imposed on additional production over the preceding year.

At the same time, export policy conditions have also been imposed by the Directorate General of Foreign Trade (DGFT), that the exporters would be required to declare at the time of exports that 50 per cent of the quantity mentioned in the shipping bill has been supplied in the domestic market during the current financial year.

“However, export to Bhutan and Nepal is exempted from this condition. Similarly, this condition is not applicable to 100 per cent EoUs and units in SEZs. Such exporters are also required to file a quarterly return to the Ministry of Petroleum and Natural Gas,” the DGFT said in a statement. India exported only around 13 MT of petrol and 32 MT of diesel in 2021-22.

The government added that a special additional excise duty of Rs 6 per litre was imposed on exports of ATF also due to the similar reasons. In 2021-22, India exported only around 5 MT of ATF.

To curb rising gold imports, the government hiked customs duty on the yellow metal to 15 per cent from 10.75 per cent. In May, India imported 107 tonnes of gold, the highest in a year, putting additional pressure on the CAD.

Madhavi Arora, lead economist, Emkay, said the indirect import and export curbs by duty tweaks were aimed at reducing the impending pressure on the CAD and thus the currency. “This policy action by the government comes after the RBI’s consistent intertervention in all currency trading spaces to signal its support. Dislocation in forward rates, falling forex cover, persistently high commodity prices have implied the RBI intervention strategy cannot be the sole support for the rupee and fiscal support in the form of trade curbs might be needed,” she added.

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