Analysts said on Wednesday that the reduction to zero of the extraordinary tax on domestically produced crude oil is not expected to have a significant impact on government revenues or the tax burden of oil companies. The move is in line with the fall in global crude oil prices and the resulting reduction in profits of domestic oil producers, they stressed.
The Centre on Tuesday reduced the tax to zero, from Rs 1,850 per tonne and Rs 2,100 per tonne in the previous two fortnights. Classified as Special Additional Duty (SAED), the one-time tax is levied on domestically produced crude oil and on export of diesel, petrol and jet fuel (ATF). The tax rates are revised every fortnight based on the average oil prices in the preceding two weeks. It had been reduced to zero once before, on April 4, 2023.
“The impact of windfall tax on oil companies has been limited recently as oil prices have been hovering around $70-72 per barrel. In the last fortnightly period, the windfall tax on domestically produced crude had been Rs 1,850 per tonne, which translated to Rs 3 per barrel,” Prashant Vasisht, Senior Vice President and Co-Head, Corporate Ratings Group, ICRA Limited, told Business Standard.
“Since the tax was imposed, upstream companies’ revenues have been in the range of $70 to $75 per barrel. Therefore, the removal of the tax is not expected to impact oil companies much,” he added.
Windfall taxes are intended to tax the profits a company makes from an external, sometimes unprecedented, event (for example, the rise in energy prices resulting from the conflict between Russia and Ukraine). But the fall in global oil prices has undermined the justification for the tax.
Debasish Mishra, growth director at Deloitte South Asia, said upstream oil companies might not be making windfall profits recently, which removes the justification for a windfall tax. “International crude oil prices have corrected to around $70 per barrel with a downward bias due to the demand scenario. Given the geology (the cost of producing crude oil remains high in India), domestic oil producers might not have been making much windfall profits,” Mishra said.
No impact on revenue
Mishra added that the move is not expected to have any significant impact on the exchequer either. “The revenue earned by the government from windfall tax has not been as significant as that earned from excise duty on sales of petrol and diesel,” he said.
Analysts believe the latest tax cut is in line with expectations. “When the windfall tax was first imposed in August 2022, the government had said that it would reconsider the imposition of windfall tax in case global crude oil prices fell to around $70 per barrel. It has been reduced to zero as part of the latest review as global prices had fallen to that level,” Vasisht said.
A case in point is that the duty has been slowly coming down from Rs 7,000 per tonne at the end of July, in line with the fall in global crude oil prices. Global crude oil prices have fallen every month since April, when they had breached the $90 per barrel level. Last week, benchmark Brent crude futures prices fell to a 33-month low of $69 per barrel on weak demand and concerns about oversupply.
First published: September 18, 2024 | 21:12 IS
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